Open architecture platforms come under scrutiny

Recent mergers of asset management and wealth arms have raised the issue of whether open architecture platforms are under pressure.

While some fund houses agree that pressure is building, opinion has been divided as to whether there is a uniform operating model which can be implemented across the industry.

Meanwhile the question of wealth managers’ scale has been brought up, with the suggestion that global players without a dominant presence are likely to increasingly lose market share to local and regional firms.

According to panellists discussing consolidation in the wealth management industry at the recent FundForum Asia in Hong Kong, there is no one-size-fits-all approach when it comes to the best operating model for serving clients.

Malik Sarwar, HSBC’s global head of wealth development, pointed to the case of Merrill Lynch when it sold its asset management business to BlackRock in 2006. The move resulted in a sales boost for Merrill Lynch because the firm was perceived by the marketplace to have become objective; scandals over the sale of in-house products meant that without its AM arm, Merrill salesmen gained a measure of trust.

But there are also institutions that have proprietary as well as third-party products, which sit well with clients, noted Sarwar. For these firms, a great brand and a position in the market which builds trust is the defining factor.  “In this case clients prefer that the institution’s manufacturing be made available to them,” he said.

Mark Smallwood, head of franchise development and strategic initiatives at Deutsche Asset and Wealth Management, defended its merged asset and wealth business model. He said wealthy clients have at least three private banks. “If you sit in an organisation and promote your products you are going to lose very quickly and relationship managers are not paid to do that,” he said. He also noted that relationship managers in Asia are pretty ruthless and won’t recommend a product that will not reward them.

Smallwood also pointed out that despite its merged units, it operates an open architecture platform with 200 mutual funds on the recommended list represented by 54 third-party investment houses, along with 30 liquid alternative strategies from 25 third-party managers. “Are we conflicted? I don’t think so,” he said.

In addition to Deutsche’s merger, Credit Suisse and Manulife have consolidated their asset management and wealth arms to cut costs and boost efficiency. Today AsianInvestor also exclusively revealed that Swiss bank UBS is reorganising its wealth business, by moving its global financial intermediaries business into the investment products and services unit, in a bid to achieve synergies.

HSBC’s Sarwar said that on the issue of conflict of interest, the battle lines have been drawn with clients at the centre. Though clients usually have multiple wealth advisers, the primary adviser gets two to three times the amount of asset and revenue flow from the client.

How to achieve that is not to be just an asset manager but rather to focus on the client’s life goals “from asset and liability management, estate planning, the whole thing, knowing they will have other institutions,” Sarwar said.

“If you are the first one they will call that’s because you offer value, transparency and most importantly, service - service on the basis of what’s agreed with clients, proactively offering insights about markets that are relevant to them.”

At the forum, the panellists were also asked about how wealth managers work out which countries to focus on, since more firms were concentrating on fewer markets.

Sarwar said global players without scale and a strong presence will likely shrink and as a result regional or local players will have a dominant share. This will open up an opportunity for players which can provide multi-jurisdictional capabilities and services.

Sarwar said that by definition high-net-worth and ultra-high-net-worth investors were global citizens and had businesses in multiple jurisdictions. As a result, gaps in serving this segment were becoming bigger because few institutions had the ability or the appetite to go there.

"So those that can figure that out ... how to do multi-jurisdictional investing of cash flow, estate planning ... because institutions are stepping back, that space is now open for those who can make a go for it," Sarwar said.

Whether the industry will see further consolidation through mergers and acquisition, of which the Coutts and UBP deal was the most recent, both Deutsche and RBC Wealth Management agreed that there will be further consolidation.

Deutsche’s Smallwood said: “We have been in the bull market for six years. Consolidation will speed up when we get to the next bear market.”

RBC Wealth Management’s managing director for Asia Michael Yong-Haron said that ultimately it all came down to scale.

“For a private bank to have a critical mass it must have at least $20 billion in AUM,” he said.  “If they don’t achieve that, cost will kill them. The industry will continue to consolidate and the industry will be left with 7-8 global players and then the regional players.”