Asia experiments with discretionary model
Following the turmoil in the financial markets, as the world adapts to a much changed investment landscape, private banking clients are looking once again at whether they should opt for discretionary or advisory services.
In Europe and the US, there are reports of wealthy individuals severing the discretionary mandates they held with their private banks. Well-heeled investors who got their fingers burned in the financial crisis have also raised questions about risk management and high fees.
The major differences between advisory and discretionary management services are the extent to which a client is involved in the day-to-day management of their portfolio. With a discretionary service, once investment objectives have been identified and agreed to, the private banker makes investment decisions based on the client's risk profile and according to an agreed investment time frame. A flat fee is usually paid based on a percentage of the value of assets under management.
An advisory service involves clients making their own investment and asset allocation decisions, which are done through their private bank on a fee-per-transaction basis.
While wealthy investors in the US and Europe query the judgment of giving a carte blanche discretionary mandate to a private bank, a number of institutions say the take-up of such mandates is registering a slight increase in Hong Kong. Private bankers say that, as second-generation beneficiaries of family wealth and trusts have less involvement with the day-to-day administration of their assets, they are turning to these mandates to manage their investments.
According to Kenneth Ho, Bank Julius Baer's head of products Asia-Pacific, in Europe and the US discretionary mandates account for about 30 per cent of private bank business. In Asia, discretionary services account for about 10 per cent. 'In Asia we are coming off a very low base, but we are seeing a gradual shift towards client interest in discretionary services, but it is still advisory business that makes up the bulk of Hong Kong private banking client relationships.'
In the past, Asian clients were reluctant to entrust their asset management needs to a discretionary service, as the clients tended to be first-generation wealth creators who wanted to manage their own money.
But, said Ho: 'Frankly speaking, they are not always as successful as they would like to be. Since the crisis, more investors, including wealthy first-generation business people, recognise that sometimes money management is better left to the professionals.'
He said that, since the crisis, as private banks looked to secure stable revenues, a push has been made to increase the amount of discretionary mandates they handled as these produced consistent revenues. But a discretionary-services focus might lower a banks' overall revenues, especially during a bull market.
'The discretionary model is based on a banks' ability to manage a portfolio and not a series of individual products based on specific client parameters over an extended period of time. An advisory model where a bank would benefit from multiple transactions, the revenue stream generated by a discretionary model, may not be so attractive,' Ho said.
With fallout from the global economic crisis prompting wealthy clients to pay more attention to mitigating risk, Soon Gek Chew, Clariden Leu's head of portfolio management and investment strategy, said the bank had introduced tail-risk protection in discretionary mandates to partially hedge against losses.
'This is basically actively managing volatility through a regime identification process. As we have seen with the current Japanese situation with concerns over nuclear-reactor incidents, tail risk is not confined to financial matters,' Chew said. She said having systems in place mitigated the impact of non-finance-related events.
Chew said private bank clients who sought discretionary services wanted professionals to manage their money within parameters to meet investment objectives. Money is managed within a global asset allocation framework encompassing cash, bonds, equities, commodities and alternatives.
Anurag Mahesh, head of global investment services Asia-Pacific at Deutsche Bank Private Wealth Management, said whether clients chose advisory or discretionary services was less about markets and fees and more about the evolution of the industry. Mahesh said many wealthy first-generation Asians preferred to use a private banks' advisory services because they liked to manage their wealth on a daily basis. 'As wealth gets passed on from generation to generation, individuals sometimes have less emotional attachment to managing their assets on a day-to-day basis and this is when discretionary services become more important to them,' said Mahesh.