Impact of Family Offices and EAMs to the Private Banks in Asia

Lately, Asia has been witnessing a rising number of family offices and External Asset Managers (EAM) setting up their businesses here. Private banks here have been quick to setup EAM desks and family offices to address the challenges from these new market entries.

While these actions are to a certain extent a stop-gap strategies to address the threats from these competitors, there is a need to understand the medium to longer implications of these new entries to the existing private banks.

a) Shift to transaction and custodian services

With the attractiveness of offering independent advice, Ultra High Networth Individuals (UHNWI) and families, with net assets in excess of USD50mio, are looking towards EAMs and family offices for wealth planning, advisory and discretionary services. Future demand for private banking services by these customer segments will tend to be more transactions and custodian-related with the private banks.

b) Changes in client relationship management

With the available choices of EAMs and family offices services, some of the UHNWIs and families will tend to establish relationships with one of these institutions away from establishing relationships with multiple private banks. From the private bank perspective, EAMs and family offices will tend to be the primary contact rather than the client themselves. Client relationships for these segments, will move from a primary to a secondary role.

What is next for Private Banks?

It is not doom and gloom for private banks with the entries of EAMs and family offices. There are opportunities if the right strategies are embarked.

1) Improved execution services for products and services
To attract clients to the private banks, private banks must offer state-of-the-art execution platforms for clients, EAMs and family offices. One such area of improvement is order management. Existing platforms need to be overhauled or upgraded to reflect the growing sophistication of investment products demanded by investors. STP, transparent pricing, accurate client reporting and ease of retrocessions calculation are among the areas ripe for improvements.

2) Effective client relationship management
In the past, an effective client relationship is about how one understands the client and execute a proposal that meets the needs of the client. However, private banks can no longer ignore the importance of the social network. Private banks must incorporate some form of social network with the EAMs and family offices. This form of enterprise network allows the private bank, EAMs and family offices to link up in a B2B (business-to-business) network for prospect introduction, transactions/products enquiries and marketing. Lombard Odier, a swiss-based boutique private bank, established a social network (http://www.e-merging.com/) linking EAMs and family offices to their network.

The use of EAMs and Family Offices in Asia is still at its infancy stage compare to Europe and US. However, demand for EAMs and family offices are set to rise in the coming years and private banks must evaluate their business strategies to ride on this growth.

The "Network Effects" of successful organizations

Recently, while clearing some of my old magazines, I came across an article in Businessweek ("The Web's Walking Dead", Sep19-25, 2011 Issue) describing how some of the technology companies like Yahoo and AOL who used to be the darling of consumers and investors are now in tatters.  Other tech companies like Nokia and RIM came to my mind. While it is easy to pin the blame on poor product strategy and execution or even management, what is interesting in the article was the mentioned that these failures were due to the lack of the "network effects" that is necessary to remain successful.

Technology sector is a highly competitive one. Any one who has an great idea and a great product can market to the consumer with ease. If successful, the business will grow. But, this is the point where the similarities between a successful startup and a successful organisation stop.

So what are the "network effects" for a tech company to be successful? To understand this concept, it is easier to give a few examples. The mention of Apple, Oracle, Amazon, SAP, Cisco and Microsoft will strike cords with many of us who knows these companies for many years. There are 3 common features found across these organizations:

a) A successful suite of products backed by strong external community developers, functional and technical expertise.
If one look at the likes of SAP, Cisco or Oracle, there are many communities (across regions) to support the local sales, product and technical support because these organizations recognize that the way to expand the reach is to create opportunities for anyone to pick up the product knowledge and instantly becomes a "walking billboard" for the organization.

b) Establishment of a strong supply chain linking the suppliers to the end consumers
Apple and Amazon recognized that consumers want to acquire the best product at the most competitive price. Besides offering its own products for sale, Amazon evolves and started to look for suppliers who can offer a better pricing than itself and link it up with consumers via its website. iTunes and App Store creations help to create a global marketplace that stimulates the entrepreneurial activities that indirectly demands the products and services for sustainable growth.

c) The need to recognize that there are inherent limitations within the organization
Management is always quick to highlight successful business stories to investors and employees to boost the stock prices and company morale, respectively. But management must also recognize that there are inherent limitations in the organization that impedes the growth. Besides, organic growth or M&A, the 3rd option is to grow is explore the community by understand the intricate network that it has build and tap those opportunities.

With the rise of social media, organizations need to understand the how to bring various stakeholders together and continue to grow its business.