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The EAM model in asset management: Addressing the gaps in private bank’s service quality


The financial upheaval from 2009 onwards is a staggering period for private banks. Decline in asset prices as well as the near or actual collapse of some of the considered stable investment firms pushed revenues 25 to 30  per cent below pre-crisis levels. An added adverse challenge emanates from governments’ crackdown on untaxed offshore accounts of affluent nationals, and given the tightening regulatory pressure, wealth will increasingly be maintained onshore.

HNW clients’ expected response is to side with caution, to move into less risky financial instruments, and to demand greater transparency and involvement in placement decisions. The turmoil and the accompanying clients’ behavioural alterations threaten private banks’ profitability, yet amidst huge declines in revenue bases they have managed to float, proof of their ability to survive recessions.
On the other hand, the private banks’ staying power has to contend with growing discontentment in the quality of service, particularly in asset management evidenced by current gaps expressed by stakeholders. Christophe Audergon (pictured), who is both founder and CEO of Singapore-based independent asset manager Crossinvest (Asia) Pte Ltd and a former vice president of the Association of Independent Asset Managers (AIAM), shares his opinion that big private banking investment advice may not always be in the best interests of the client: “In reality, the need to give priority to institutional interest leads to actions or guidance inconsistent with one's claims.”
A private bank’s fee is usually not limited to overseeing a client’s overall portfolio as it derives income from multiple layers of fees often for managing the sub-accounts filled with proprietary products from the bank itself or from affiliated mutual funds, hedge funds and money market funds. Such captive selling is practiced widely in the industry.
The performance of a bank’s internal products is not a required report to third-party databases, hence, may be passed on to the investor without any worthwhile information such as assets under management in the product, along with identity, qualifications, and even the location of portfolio managers. 
Booz & Company, a consulting firm, has taken scrutiny of the significant development engendered by the worst financial crisis in the eight decades impacting the future of private banking. One is the structural shift in global wealth distribution toward Asia and other emerging markets. HNWI will be more pragmatic and astute in choice of financial products. The pervasive apprehension on the state of financial institutions will highlight the importance of relationship manager as advisor, on top of additional services required by the client. Because pressure to earn and win new clients will increase, the competition will be fierce, with the winner decided through criteria of quality and greater array of services.  New asset management business models will emerge as private banks struggle to accommodate a wide gamut of HNWI accounts of varying degrees of service requirements.
In fact, a relatively new approach in the Asian asset management scene, the EAM business model is gaining popularity. It involves the management of assets of HNW clients through a strong, workable synergy with leading private banks. The entire business model hinges on an external asset manager (EAM) providing service to clients previously served by a bank in close collaboration with the bank’s RMs. 
Though the model capitalises on cooperation between the bank and the EAM, there's still antagonism from the former. However, Audergon argues that such is due to a lot of misunderstanding. “In fact, asset managers, external fund managers and investment firms partner with Crossinvest Asia to leverage its robust operational platform and on-the-ground access to investment opportunities. Private banks should realise that we complement their service mandates to their clients, hence they should regard us as beneficent partners,” he says.
Under this scheme, banks still book the assets on their platform, and take care of the custody and the brokerage. The advice to the client is the domain of the EAM. Audergon explains that this is how the model works: “First, the client opens a bank account in his/her name. This account holds only the client’s assets and remains under their ownership at all times. The firm determines and evaluates the client’s investment objectives and risk tolerance upon which become the basis for the construction of a bespoke portfolio. Once this stage is completed  then begins to manage the client’s portfolio only after it has been awarded a Limited Power of Administration over the account.”
Several banks, particularly those of Swiss origins, have been implementing the model, which has been in place in the country for years. Credit Suisse has more than CHF90 billion in assets under management from EAMs, providing custody, brokerage and lending services through the expertise of external managers. It uses an open architecture platform through which external managers can access investment products.  
EAMs hold a capital market services (CMS) license. While they may function within the sphere of a bank, they are directly regulated by the authorised bodies. “Under our license, we have to abide by MAS rules, identifying clients’ risk profiles and the suitability of investments before presenting appropriate investment advice,” Credit Suisse conducts detailed assessments of external managers before working with them, and continues to conduct due diligence afterwards.
Audergon adds that the EAM business model is still in its infancy hence may be too early to determine traction. What is essential, however, is that an option is offered to the public, especially the targeted clients, and thinking that they have a choice in the management of their wealth gives them a feeling of security. 

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