Edmond de Rothschild’s exit from HK “just the tip of the iceberg”

Swiss asset and wealth manager Edmond de Rothschild (EdR) said yesterday it would close its Hong Kong operation, adding to the mounting list of casualties in Asia’s investment industry. 

EdR’s move is just the tip of the iceberg, said Justin Ong, ‎Asia-Pacific asset and wealth management leader at consultancy PwC. “We will see more of these [closures or acquisitions of asset and wealth managers]."

EdR is a small player in Asia, with branches in Hong Kong and China but not Singapore, that does not publish its regional assets under management. They are understood to be much lower than $13 billion, which was the AUM of RBC Wealth Management in 2015, ranked 20th in Asian Private Banker's listing of the 20 largest private banks in Asia Pacific. EdR’s global AUM stood at Sfr114.8 billion ($113.7 billion) as of end-2015.

Ong (pictured below left) said: “The asset management industry is going through significant changes, largely driven by more regulations and compliance costs, requirements for new business models in distribution and sales, as well as a talent crunch in a number of key areas.”

All these issues are driving a squeeze in margins, and asset managers looking to be profitable in Asia need to scale up and build critical mass across the region. Hence more M&A and partnerships will take place, noted Ong.

Indeed, EdR’s exit announcement came just two days after ABN Amro confirmed the sale of its Asian private bank to LGT, while Barclays sold its regional wealth business to Singapore’s OCBC earlier this year. These are just two recent examples of the rising tide of consolidation.

Keith Pogson, senior partner in the Asia-Pacific financial services division at consultancy EY, agreed that EdR’s move came as no surprise and that scale was also now key for wealth managers in the region. “If you are going to stay in Asia you need either to be a large-scale organisation or a strong niche player,” he noted.

Compliance challenge

Compliance is the main challenge for wealth managers, said Pogson. “At this point in time it is really compliance driving this need to get scale – and it will be technology in the future.”

Companies like EdR that don’t have retail businesses may want to opt out of Asia to avoid regulatory and compliance burdens, he noted. Private banking is heavily regulated, but not for companies dealing with wholesale distribution, "so why would you keep your regulated entity in place?” 

“Even if you have individuals advising on funds back home,” Pogson added, “that is such a different regulatory setup than the one you need [in Hong Kong or Singapore].”

Moreover, Asian portfolios can easily be run out of Europe now, he said, pointing to greater transparency in information flow these days thanks to digital technology. Therefore it is no longer imperative for wholesale businesses to have boots on the ground.

The prevailing investment industry challenges are not exclusive to Asia. Unprecedented fee pressure and slow growth will force many asset managers worldwide to cut costs and change their business strategies to survive, said research firm Casey Quirk in a report released this week.

Some of the defining characteristics in the industry now are: lower capital market returns, shrinking growth of assets to manage, and widespread portfolio de-risking. Other long-term challenges include increasing government regulation of investment advice providers and disruptive technologies that circumvent traditional asset managers, said Casey Quirk.

Continuing partnerships

EdR declined to say when it would close its Hong Kong operation, but a source said it would not be at the end of this year. The firm also declined to comment on how it would manage staff and client portfolios.

In a statement yesterday, EdR said it would maintain selective partnerships in Asia, such as with Japan’s SMBC Nikko Securities and Samsung Asset Management. 

The firm had announced its strategic partnership with Samsung AM April this year, which involved the Swiss firm providing investment advisory to the Korean manager on European equties and debt.

The firm has also held a 25% stake in Shanghai-based Zhonghai Fund Management since 2011, which had AUM of just Rmb38.5 billion ($5.5 billion) as of September. EdR declined to comment on the future of its China operations.