“Some EAMs are struggling to stay afloat, and several are keen to be acquired,” said Steven Seow, Asia head of wealth management consulting at Mercer. He declined to identify any of the companies in question.
“Some preliminary conversations are happening between private banks and EAMs about potential deals,” added Singapore-based Seow. “There’s some synergy in that, but is this the best thing for clients?”
Banks may be looking to buy these businesses for tactical reasons, in order to build their AUM so they look better on the league tables, he said. “I would rather see EAMs merge with each other to gain economies of scale. But most EAMs are cash-strapped and unable to acquire.”
There would be a certain irony in such firms being bought by private banks; one of the drivers of the development of EAMs was clients' disillusionment with private banks, leading to relationship managers leaving larger firms to set up independent businesses. Indeed, EAMs are often also known as independent asset managers.
Such firms are generally set up to manage liquid portfolios on behalf of wealthy investors, but they are finding life more difficult these days for various reasons, noted Seow, including declining revenues, high costs and rising competition.
EAMs' margins have shrunk as their clients have lost money on equities and foreign exchange due to market corrections in the past two years, he said. He pointed to events last year such as the China stock-market plunge in mid-year and sterling's post-Brexit crash after June 23.
Such flow business is a volatile and unstable revenue stream and therefore not sustainable on its own, added Seow. “Many firms that rely on advisory business have fallen on hard times. Payouts on transactions are based on retrocession payments from banks, so they’ve lost out on those.”
Margins may be falling, but costs remain stubbornly consistent. Annual operating costs are at least $1 million, said Seow, citing $300,000 for the CEO’s salary, $500,000-plus for other staff, $180,000 for rent and $180,000 for other admin and IT. So if an EAM is charging a fee of 50 basis points, it needs $200 million under management just to break even.
“Reaching the first half billion dollars is the path to survival, but it’s hard,” said Seow. Some have hit the $1 billion mark, but passing the $2 billion mark is where the big challenge comes now, he noted.
Firms such as AL wealth Partners, HP Wealth Management, Swiss Asia, Taurus Wealth Advisors and Thirdrock – all based in Singapore – are among those known to have passed the billion-dollar mark. Some are even close to or have exceeded $2 billion in AUM.
But there are others struggling to grow big enough to sustainable size.
Philippe Legrand, chief executive of London & Capital Asia, a Hong Kong-based multi-family office, told AsianInvestor: “The fact that some [EAMs] are looking to sell their business doesn’t surprise me. Everyone is looking at the next step they will take; some will want to grow, while others might want to take advantage of the growing interest in this space and monetise.”
Legrand said there were broadly two types of EAMs: those that were set up with a limited number of people to handle existing clients, and those that launched to service existing clients but with the aim of also attracting new clients by expanding the scope of their services to those of a multi-family office.
Look out for an article to come soon on how EAMs might take the next step and how certain players have done so.