Asian wealthy warm to discretionary portfolios
Discretionary portfolio management (DPM) is gaining popularity among wealthy clients, but it's not an easy sell nor is it a simple task hiring and keeping the people to do it, agreed heads of Southeast Asian private banks.
They were speaking at a recent roundtable* hosted by AsianInvestor and BNY Mellon.
The DPM and funds business of Singapore-based DBS Private Bank has grown more than threefold in the past three years, admittedly from a low base, said Lawrence Lua, head of South and Southeast Asia.
It's a fairly tough sell in Asia though. “Our clients’ DNA is very different from that of Western banks," noted Lua. "In Asia, a lot of the tycoons still want to touch their investments. but increasingly you can see a shift in their lifestyles – they want to enjoy the fruits of their labour, so they are using DPM.
“Another issue is that when you speak to clients, they think only the Swiss banks can do DPM,” he added. “But things are changing.”
Speaking separately from the roundtable, Alexis Calla, global head of investment advisory at Standard Chartered, said DPM had been the fastest growing area of business for his firm's private banking business in recent years.
However, there are significant challenges in providing a discretionary offering, such as unrealistic client expectations.
Alvin Lee, Singapore-based managing director of wealth management at Maybank, said: “It’s common to hear clients say that if they invest their money in their business, they can get 30% return. Consequently, if banks are offering returns of 5%, it will be a hard sell. Having said that, there’s definitely a trend towards DPM.”
Finding and keeping good investment staff is also an issue. “It’s very costly to try to build an asset management and investment team, because it’s challenging to retain these talents,” noted Carolyn Leng, head of private banking at CIMB in Kuala Lumpur.
The Malaysian bank doesn't have a DPM offering because it doesn't have an asset management licence; instead it tends to use external fund managers.
“Another challenge when you hire someone from an asset management background is that he/she may get frustrated as they do not have direct funds to manage,” she added. “Instead, they are more dependent on the RMs. Third-party management is cheaper in a way and more quickly scalable.”
Another Malaysian group, AmInvestment Bank, uses third-party managers and focuses on DPM for things the third parties don’t offer. Again, talent is an issue, noted Kee Kin Onn, the firm's head of private banking.
“You can create a discretionary portfolio using an external manager, but you know that sometimes the guy that’s running it may not be the best guy – because the best guys run the big funds,” said Kee. “So it’s best just to go with the fund sometimes.”
Staff turnover can be a problem, DBS's Lua agreed. “I know many institutions have suffered because some people leave, someone steps in, and then there’s a disconnect for a short while – and sometimes it can be a very long while.”
Another issue with regard to discretionary management is monitoring. “With DPM, the client has to give a certain level of trust to the person running the portfolio,” noted Kee. “With daily monitoring, you probably need someone else to do it for you, because doing that monitoring on your own can be quite time-intensive.”
One way of combining access to external managers with DPM is by using separately managed accounts (SMAs). BNY Mellon, for example, offers an SMA platform that allows private banks to create a customised portfolio for $1 million – a lot less than $50 million, a typical minimum threshold for institutional mandates.
“Today if you have $10 million to allocate and you want to have transparency with that, you’re not going to get it; you’re going to get an institutional share class,” said AJ Harper, Asia-Pacific president and CEO of managed investments at BNY Mellon. “That comes in mutual fund form, which from conversations I hear is not enough.”
* The full roundtable discussion appeared in the July issue of AsianInvestor magazine.