This news service is launching a research report with UBS about the rise of external asset managers in Asia. In this feature, it examines how China's market volatility may be giving EAMs and other players a chance to prove their value to clients.

WealthBriefing has partnered with UBS to research the external asset manager sector in Asia, and this week launched an extensive report on its development – of which this feature is part. External asset managers may be relatively new kids on the block in Hong Kong, Singapore and other parts of the Asia-Pacific region but the ascent of a younger, affluent client base and rising costs for traditional service providers should bode well for EAMs in the years ahead. To see a previous feature about EAMs in Asia, and the challenges and opportunities ahead for this sector, see here.

In this article, this news service talks to Dominic Gamble, who launched findaWEALTHMANAGER.com in the UK in 2012 - following up with sister service WEALTH in Singapore and Hong Kong in 2015 and 2016 - and so has closely observed the contrasting evolution of investors regionally.

He believes the Chinese stock market’s wild ride has actually provided wealth managers with an excellent platform for making their message hit home with HNW investors; those in the upper echelons of Chinese wealth, meanwhile, will be left weighing the true feasibility of establishing family offices. 

True to received industry wisdom about the Far East, Gamble has observed profound differences between the behaviours and expectations of investors in the West and Asia, with the latter tending to be far more hands-on and taking a lead role in investment decisions. Strikingly, while 57 per cent of the HNW individuals coming to the findaWEALTHMANAGER.com UK website over 2015 requested a discretionary relationship, only 25 per cent requested the same via the WEALTH site in Singapore. Chinese investors might be expected to show a similar preference for retaining control, or even significantly higher, for better or worse. 

Gamble – a former private banker – has observed that high levels of portfolio churn can often go unchecked in some Asian investment management models as a result, proving a significant drag on performance (he also often sees self-directed investors presenting with portfolios very much misaligned with their true risk tolerance). Add in the temptation to gamble in what have been red-hot markets and many investors will have suffered. He therefore believes the Asian HNW population is well primed to hear about the benefits of long-term investing and truly disciplined asset allocation (something he says is a “used and abused term” in the region). Investment advisors with nothing to gain from the accrual of transaction fees – like EAMs – could have a strong message to convey to Asian clients, and the Chinese in particular.

China’s huge army of retail investors having stoked the Shenzhen Index to heights as giddy as 34 times forward earnings, and with leveraged trading widespread in the country, it is apparent that a massive number will have been literally playing the markets, in Gamble’s view. “With 90 million share trading accounts active in China, one has to wonder just how much the average investor understands asset allocation and risk,” he said. 

“Wealth managers should be preaching a more hands-off, long-term strategic view, picking sectors and geographies that the investor really likes for the long term, not just today,” he said. “One of the key messages we’ve been promoting with our investor content in Asia is that performance is about diversification and positioning for longer-term growth, rather than frequently chopping and changing investments.”

The risk management message 
Worrying as market gyrations have been, in his view they may have been beneficial to the maturation of the wealth management mindset among Chinese investors, serving as a “wake-up call” ensuring the risk management side of the story gets the attention it deserves.  

“China’s affluent investors need to really understand the risk they are taking for their life-stage and profile, and we have found this is usually seriously lacking in their psychology,” he said. “We often find the role of a wealth manager is just as much about counselling as it is about execution and advice - and there’s no doubt there is a challenge in dialling clients’ return expectations down and turning the conversation round to risk management.”

Accelerated development
Yet it is perhaps another characteristic of Chinese clients that wealth managers wishing to crack the country should have front of mind, Gamble said. As evidenced by the huge wealth thousands of entrepreneurs have amassed in stunningly short time frames, Chinese clients learn fast. 

“Despite the often-talked about gambling psychology, Chinese investors will learn very quickly the painful lessons taught by making big investment calls without the right expertise,” said Gamble. “In the West, it took half a century for the HNW community to seize on the advantages of wealth management and the concept of wealth preservation. But things are so fast moving here now in Asia, you can almost see the offering - and clients - becoming more sophisticated before your eyes.” 

Singapore and Hong Kong are in the ascendancy as international wealth management hubs and are predicted to be the equal of Switzerland - the historic heartland of the private banking industry – within five years. The Alpine state has notably largely retained its allure for clients internationally despite the death of banking secrecy, however, due to its abundance of expertise and providers supporting the work of wealth managers. Much of the attractiveness of any jurisdiction is driven by – and in turn drives – the evolution of all of the infrastructure supporting the work of wealth managers. 

Chinese clients are certainly heeding the siren call of offshore structuring and investments to protect wealth as it passes into the next generation; the overlay of complexity the PRC’s political situation represents can never be forgotten. As one panellist to the report put it: “UHNW individuals are seeking succession planning solutions; the Chinese do not simply do not feel safe having all their assets within China.”

As Gamble highlighted, Hong Kong’s professional infrastructure makes it the natural destination for mainland Chinese setting up family offices. “This allows them to access a larger pool of international expertise and experience,” said Gamble. “It also allows the family office to access more international investment opportunities because of the well-recognised Hong Kong financial system and investment vehicles.” What might be described as following the maturation of the markets is, he explained, the rationale behind WEALTH’s Asia rollout, which began with Singapore, followed by Hong Kong and with wider regional markets in sight such as Thailand.

The real feasibility of family offices
Due to the sheer size and growth of wealth in China, Gamble predicts that the absolute number of family offices will eventually be high. However, they - and other types of small wealth manager - will face the same already well-documented challenges family offices have experienced in the past ten years in the US and UK. Critical mass is crucially important amid a rising regulatory burden and other pressures.

The viability threshold for forming a family office is often said to be $100 million in AuM. Correspondingly, Gamble argues that, “family offices are great for billionaires, but less so for even what you might call ‘core’ UHNW clients”. Nor, arguably does this set-up tend to work long term without the institution itself undergoing significant evolution. 

“Family offices in China, as elsewhere in Asia, will have to be particularly well-capitalised and backed by a strong client asset base; it really isn’t viable for a family to set one up as a show of wealth. Expertise is already in short supply so they will need deep pockets to secure the best talent, along with the capabilities to deal with exponentially rising regulatory considerations,” said Gamble. 

He continued: “Towards the lower end of the wealth spectrum, a family office will need to serve several clients in order to support costs and diversify the risk of a key client departing. That then starts to look like a boutique wealth manager – or more of a Swiss-style independent wealth manager - as opposed to a family office. Indeed, that may be the way the Chinese wealth management market proliferates.”

It is easy to see how, in China and elsewhere, EAMs could step in to fill the gap for those seeking a more independent advisory model, but whose wealth does not warrant a fully-fledged family office. Indeed, some EAMs act very much act as coordinators and consultants in selecting, managing and reporting on the performance of a range of specialist investment managers for their clients (where the lines between an EAM and a multi-family office may be drawn is debateable). 

However, non-Western brands, and particularly lesser-known ones, should not expect easy success in China - nor indeed in any Asian market - Gamble warns. Domestic banks see their opportunity and further competition might be coming from unexpected quarters: Asian instant messaging platforms have made inroads into financial services via money market funds and online commerce giant Alibaba is said to be considering offering investment services, for instance. Brand may be very important to Asian clients, but not necessarily traditional financial ones.

Above all, he advises all those eying the Asian wealth management market to bear in mind that the fee-based, capital preservation-orientated conception of wealth management is still gaining traction. It follows that underscoring precisely where value has been delivered will be even higher on the agenda with clients in Asia. Gamble concluded: “Wealth managers face a triple challenge, the first part being getting clients to delegate decision-making responsibility. That’s often simply not in their mindset, especially given that this is often first-generation wealth and they have worked very hard to get to where they are. Second is the move to wealth preservation mindset – which will become easier as the next generations come through. While the regional investor base tends to have a highly transactional and speculative mindset, the family office is akin to a long-term investment vehicle more like a pension fund in investment style and time frame. Third is getting clients on board with paying a fixed, transparent management fee for wealth managers. The Asian wealth market is maturing and in time will evolve similarly to the Western model. But we are a few more crises, and at least a generation, away from that becoming the norm.”