The dominant wealth management model in Asia – offshore private banking using an advisory model – will not last, argues Jean-Louis Nakamura, chief investment officer at Swiss bank Lombard Odier.

The advisory or transaction approach, where bankers help clients trade their portfolios, is more prevalent in Asia than elsewhere, he noted. "This model requires huge manpower; obviously, we do not have the resources to compete with the big banks."

However, this approach is unlikely to last because it will be less profitable and scalable in the long run, Nakamura said. “It is also not the best way to protect and generate investment returns for clients because of the hidden interest to churn portfolio to gain retrocession or commissions.”

Moreover, he said: “We do not believe in the future of offshore private banking. It is becoming extremely difficult to open an account offshore because of compliance issues.”

Lombard Odier’s thinking on advisory models and offshore private banking has led it to focus on discretionary portfolio management (DPM) and expand its business into onshore markets through partnerships. The bank’s Asia head, Vincent Duhamel, has said it preferred to take this approach than to pursue acquisitions in the region, as reported.

As result, the Geneva-based firm aims to develop its business onshore by helping local firms build private banks. “It is beneficial for them and us,” noted Hong Kong-based Nakamura. “We provide intensive training to local staff [about] our process and products. And we get some fees and promote the way we manage money in Asia.”

Lombard Odier has strategic partners in Japan, Korea and China, and has started moving into Southeast Asia through a tie-up with Thailand’s Kasikornbank, signed in late 2014. “We’re eyeing other markets in Asia, and maybe other Southeast Asian countries, next,” said Nakamura.

Moreover, building a DPM business is easier for pure private banks such as Lombard Odier than for the universal banks, said Nakamura. “[The big players] cannot ignore a large portion of their market share, which is clients asking for advisory services. But obviously they want to go to DPM because the fees are more stable.”

He is not alone in pointing out that private banks, especially the smaller players, need to review their business models in Asia if they are to survive and prosper in today's tougher environment, as reported.

As for the products Lombard Odier uses for DPM, exchange-traded funds now account for 20-25% of its portfolios. “When we think a market is so efficient and difficult to outperform by active managers,” said Nakamura, “we invest in pure traditional ETFs to save cost and fees.”

Meanwhile, he does not believe structured products add value. They offer the luxury of "perceived certainty in a very uncertain world", he noted, but at a huge cost in terms of liquidity and counterparty risk and a significant transfer of value in favour of the structuring bank.

Wealth managers in the region have told AsianInvestor in recent years that DPM is the fastest growing part of their business, though usually from a low base. But they have also said it is difficult to find the expertise to build a strong DPM team.

Asked his view on private banking consolidation, Nakamura said it was “a run after assets under management” and that it had been increasingly difficult to improve scalability.

“You have two alternatives to build scale: grow AUM through M&A or focus on what you do,” he added. “We want to remain independent and focused, so we chose the second option. We focus on discretionary portfolio management and onshore private banking.”