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.