While these two asset and account management models are similar in many ways, they differ the critical area of how the individual managing your money makes their money. Let’s take a closer look at the details and help you find out which model best suits your investment appetite.
The Private Bank Model
Picture this: A high net worth individual or family opens an account with a private bank in a certain jurisdiction, for example, Singapore or Hong Kong. The bank then assigns a relationship manager (RM) to the client who handles all account matters. This is the traditional.
The RM taps into the bank resources to sell its products to the client, which generates revenue for the bank. Resources from the bank may include consultancy, asset allocation, portfolio management, bank services, and insurance, to name a few.
Another product is the investment research. This is called “sell-side” research because they are written to help sell the bank’s products or services to the client. The research is typically done by a team of analysts at the bank.
The RM takes these research ideas and packages them into products for the client. That can be direct brokerage, for example, where they buy into the stock or bond and a commission is charged, or it can be the sale of structured products created by the bank.
The RM is assigned a yearly revenue and Net New Money target (defined as new sources of revenue obtained after deducting cancellations, returns and other lost revenue). The RM’s yearly remuneration is usually 8-15% of the revenue and/or a percentage of Net New Money. This is an important note to make, for a reason we’ll get into later.
The RM is remunerated in part by how much bank “product” he or she can sell. They are assigned a yearly revenue and account growth targets. This is an important note to make, for a reason we’ll get into later.
The RM is paid a basic monthly salary and the difference between the salary and revenues is usually paid out as a bonus. Therefore, the higher the RM’s rank in the bank, the higher the revenue targets and hence the greater the pressure to meet these targets year after year.
This can be considered a conflict of interest and may do a disservice to the client. Is an RM obliged to serve the private bank and its sell its products, or to serve the best interests of the client? Naturally, we expect all RMs to put their clients first, but to assume that this is always the case would be imprudent.
We’ve seen high-profile stories in the media where the worst-case scenario plays out; the client’s portfolio is unable to withstand a market shock, and the bank issues a margin call forcing the client to sell off his assets in adverse market conditions at low prices.
These preventable incidents can cause the client major losses through the mismanagement of their wealth and ruin the relationship with the bank.
But there are some excellent RMs who pay attention to detail, who understand their client’s needs and risk profiles, and are trusted for their expert and fair financial advice. It is important to have an RM who serves your needs and can add value to your finances, not theirs.
The External Asset Management Model
The external asset management (EAM) model seeks to eliminate the inherent conflicts of interest in how private banks operate with their clients. The model started in Switzerland a few decades ago and is becoming increasingly popular in Asia.
In an EAM model, the private bank continues to act as custodian of the client’s assets and provides the trading platform, but the provision of investment advice is then subbed out to an independent asset manager. The client issues a limited Power of Attorney to the manager, who works for the client, not the bank.
Eu Capital operates independently under the EAM model. We have no bias towards any banks. Instead, our team advises based on the client’s needs. We advise our clients to choose a well-capitalised bank that charges reasonable brokerage fees, and we conduct our own primary “buy- side” research—we research to buy value investments for you in the markets, not sell you products.
As managers of both investment and risk, independence is paramount. Only through independence can we seek the value of a good investment decision. In this Information Age where the markets present us with a never-ending stream of often conflicting news and opinions, an independent mind is best placed to investigate, calculate, analyse and decide.
Our objective is simple: Simplify and deliver the return. The rest will take care of itself.