Private banks admit they have a bias to their own in-house investment capabilities when providing discretionary portfolio management (DPM) to clients, but say it is for good reason, despite concerns over potential conflicts in this area.
When private banks use their in-house investment capabilities to provide DPM, they should know where to draw the line, said Mike Imam, managing partner at independent firm Silverhorn Investment Advisors.
Speaking from a client’s perspective, Imam argued that a wealth manager that specialises in a particular area should refrain from using its in-house capability when recommending taking exposure in that area. “This issue needs to be separate,” he said, speaking at AsianInvestor's Fund Selectors Forum in Hong Kong last week.
That said, if a private bank is awarded a constrained mandate and can’t find a better way of getting the desired exposure externally, Imam noted, building a new internal investment capability is perfectly acceptable.
Jean-Louis Nakamura, Asia Pacific chief investment officer at Swiss private bank Lombard Odier, admitted there was a natural bias towards using in-house managers for DPM.
“There is a small positive bias towards selecting internal funds because the underlying managers have better access to us,” he added.
Using in-house resources rather than external houses also means that a private bank will tend to be better informed, said Nakamura. For example, when an internal portfolio manager departs, the bank will know about it faster and therefore be able to react quicker.
As long as the wealth manager has the liberty to enter and exit products at will and has shown that an internal fund is a better, more cost-effective choice than an external manager, the conflict of interest issue can be managed, added Nakamura.
He also raised the question of whether using an external manager that provides retrocession to private banks using its funds was really any better a model than using in-house capabilities.
Lombard Odier has in fact been investing more in its asset management unit as it believes that the private bank will increasingly rely on the tools, process and discipline and mindset coming from the AM side. “I am an example,” noted Nakamura, who was on the asset management team in Europe for six years before joining wealth management in Asia.
Lombard’s wealth and asset management units are now sharing tools, capabilities and risk product investment processes, and even favouring some mobility between the asset and wealth management units.
Patrick Grossholz, Asia Pacific head of investment management at UBS Wealth Management, argued that it did not make any difference for DPM whether clients choose in-house asset management or bespoke wealth management solutions.
What is key is ensuring that the client does not feel there is a difference and that they are getting the best product offered, he noted. The Swiss bank has investment banking, asset management and wealth management businesses.
Ultimately, it is easy to demonstrate objectivity if one does not have an asset management arm, said Roger Bacon, Asia-Pacific ex-Japan head of managed investments and advisory at Citi Private Bank. “For us, it’s an open architecture platform,” he noted, as Citigroup sold its AM business to Legg Mason in 2005.
“If you do not have that in-house proprietary product it’s a quick discussion," added Bacon. "There’s a place for both.”