There’s already enough for private bankers in Asia to worry about – profit margins are tightening, firms are merging and the compliance burden is growing. But a new trend could soon make their lives even more stressful, at least in the short-term.
Private banks in Singapore and Hong Kong are starting to move from their traditional model of charging wealthy clients for each transaction towards a European-style strategy of managing assets on an advisory-fee (or discretionary) basis.
While only about 20% of assets are currently looked after this way in Asia, Bank of Singapore chief executive officer Bahren Shaari says “the whole industry is moving into advisory” and the proportion will rise to 40% in the future as cautious clients seek more consistent returns.
The advisory model is alluring to many bankers. “It assures them an annuitised income rather than having to generate revenue through regular transactions,” says former Merrill Lynch private banker Rahul Sen, now head of wealth management at search firm The Omerta Group in Singapore.
“Long-term, RMs should be embracing this change as it allows them to generate more stable revenue,” adds Pathik Gupta, head of Asia Pacific wealth management at consultancy McLagan. “And it frees them up from doing daily trades and chasing tactical opportunities for revenue.”
But it also creates a new set of stresses. “Private banks would expect RMs to increase the number of clients they’re serving and the AUM they’re driving,” says Gupta. “The job would be more about hunting new clients, and banks might push them to generate even higher revenues than they would have under the commission model.”
Meanwhile, bankers may not find it easy to convince both existing and prospective clients to let them manage their assets on a discretionary basis.
“The mindset of Asian investors is different from Europeans’,” says Liu San Li, an ex-Coutts banker, now head of private wealth management at I Search Worldwide in Singapore. “The majority of rich clients are still from older generations who often object to paying fees for investment advisory.”
Liu adds: “On top of the revenue pressures, RMs would face the new challenge of having to educate clients – it’s double dosage of stress.”
Under an advisory model the stresses on RMs would "intensify during down markets", adds Gupta from McLagan. “The amount of expectation management RMs will have to do with their clients will increase because they won’t be able to shift the burden of transaction advice to the clients.”
And while RMs' income should eventually be steadier, a move to advisory risks an initial fall in bonuses.
“If a bank embarks on an aggressive drive towards advisory fees, it would probably tweak its compensation system to reduce the rewards linked to revenues generated from transactions,” explains one former private banker in Singapore. “And since it’s a challenge to convert clients to advisory in a short period of time, your bonus will decrease even if your performance stays the same.”
Moving between banks could also be trickier for RMs hooked on advisory fees. “If it’s a proprietary discretionary platform, it’s tough to move over that part of the portfolio – that’s one of the reasons why some bankers in Asia aren’t entirely sold on the advisory idea,” says Sen from The Omerta Group.
“But a lot of banks offer third-party products too, which are generally easier to move,” adds Sen. “And so far RMs who were initially resistant have accepted that it’s beneficial to the client – and to them – to move part of their investments to discretionary portfolios. There’s more time to prospect for clients and to do business development.”
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