Multi-family offices facing cost challenges

Growth in the number of new external asset managers and multi-family offices in Asia seems to be slowing due to the rising cost of compliance and talent, say private bankers.
Multi-family offices facing cost challenges

The number of new external asset managers and multi-family offices in Asia has risen swiftly in the past couple of years, but now looks to be slowing as this segment gets to grip with rising costs, say private bankers.

There has been a growing trend of private bankers leaving to set up EAM/MFO firms, but this trend has started to show signs of reversal in Singapore in recent months, said Jimmy Ng, Singapore-based investment director at Swiss private bank Bordier & Cie.

“Compliance costs are higher [now than before]; there are a lot of regulatory issues to deal with,” he said during a panel discussion at AsianInvestor’s Fund Selectors Forum last week in Singapore.

Talent is also a major issue. “For EAM to build a successful business, you need to have good portfolio managers besides relationship managers,” noted Ng.

“EAMs typically charge a management fee of 1% of total AUM, but the operating cost is adding up. It’s not easy,” he said, suggesting they need at least $400 million in AUM to be profitable.

Among the biggest compliance challenges for the EAM segment are the US’s Foreign Account Tax Compliance Act (Fatca) and automatic exchange of information under the Common Reporting Standard. Even for private banks, with their in-house compliance and legal teams, these regulations are burdensome, and EAMs/MFOs typically have far fewer support staff.

Speaking on the same panel, Sascha Zehnter, head of global external asset management for Asia at Credit Suisse, made a similar point.

“Smaller companies will have difficulty coping with all the regulatory requirements; they need people with expertise in legal and compliance," he noted. "A lot are joining existing wealth manager platforms so that they can concentrate on asset management and relationship management.”

Zehnter said the lack of awareness about EAMs/MFOs was another challenge such firms face. Investors are less confident about working with a firm with no brand or reputation, he noted.

What some big EAMs have done in Europe is to launch their own fund, build a track record and market it. 

But doing so could potentially create a conflict of interest, said Ng. As the EAM grows bigger, there will be a tendency to push its own in-house products rather than sourcing the best external strategies, he noted. “If the EAM is not honest with clients when the strategy is not working, it may breach their trust.”

All that said, Zehnter expects the penetration of the EAM/MFO segment to continue to grow. It is currently estimated at 2.5%, or around $50 billion, of total wealth industry AUM in Asia Pacific. “At the moment it is a small business, but the stake will get bigger in the future,” he said. “You can see that a lot of private banks are trying to enter the market to cater to increasing demand.”

Among the private banks that recently announced plans to target the EAM segment in Asia are Switzerland's UBP and Canada's BMO Private Bank.

Ultimately, clients can often feel that private banks – at least, those that lack a separate EAM business – do not have their interests at heart

"Clients often tell us that they want to be sure their private banks have their interests in mind," said Hrishikesh Unni, executive director at Singapore-based Taurus Family Office, also on the panel.

This stems from the fact that there is an inherent conflict of interest within private banks, which face a tough juggling act to make money for the bank and the client simultaneously, he noted.

The key proposition is that EAMs provide independent advice, added Unni, but he said they still needed products and services provided by private banks. 

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