Asian millionaires are leaving behind wealth managers and others who seek to handle their funds for them as instead they take the reins themselves. They’ve lost confidence in not just private banks but also investment products amid low returns since the market woes of 2008, and instead would rather rely on their own acumen to keep and grow their money.
So said a Bloomberg report on Wednesday, which said that money managers at banks in Asia only had control over 4% of client funds. That, according to a Boston Consulting Group report in June, was down from 7% in 2006. Europe, on the other hand, relies on money managers to handle 23% of its wealth, up from 18% in 2006.
Report co-author Peter Damisch, a Zurich-based BCG partner and managing director, was quoted saying about the decline, “Asia’s wealthy lost a lot of trust in their private banks and private bankers during the 2008 financial crisis.”
That’s bad news for large wealth management firms that have expanded in Asia even as the wealthy are pulling away from them. Profits are down on a steadily falling pool of assets under management just as companies have spent considerable funds in an effort to attract larger clients and more AUM.
For HSBC Holdings, it has translated to lower earnings in 2011 than it had in 2007, despite the fact that its private bank managed 25% more assets in the Asia-Pacific region in 2011 than it did in 2007. Its annual reports have revealed that the private bank’s net operating income for local operations in 2007 was $748 million on $26.7 billion in assets. However, in 2011, its net operating income for local operations dropped despite a rise in AUM to $33.5 billion, coming in at only $712 million.
So HSBC’s private bank took in 25% less in 2011, excluding expenses, than it did in 2007, for earnings of $2.10 for every $100 in assets that it managed in the region.
Akbar Shah, head of Southeast Asia and Australia for Citigroup’s private-banking unit, said in the report that the Asia-Pacific region’s accumulation of wealth is one reason the high net worth want to control their own funds.
He was quoted saying, “The culture of Asia is such that clients are far more hands-on. Many of them have made a lot of money in the real estate markets in Asia, and these are hands-on markets,” he added. “Nobody can tell you—you need a feel for it.”
Another reason cited by Enrico Mattoli, who heads investment products and services for the richest clients of UBS AG’s Asia-Pacific wealth management unit, is the desire for high returns.
Many Asian millionaires are self-made; they are not the beneficiaries of a wealthy lineage. And after having grown their own fortunes, they have an appetite for aggressive growth, according to a March report by Standard Chartered and Scorpio Partnership—looking for annual returns of at least 12% over the next 10 years, according to the report’s survey results that spanned nine different Asian markets that included including China, India, Singapore and Hong Kong. Before the financial meltdown in 2008, private bankers’ Asian clients, according to Liew Nam Soon, a Singapore-based partner at Ernst & Young, were sold products with high fees and commissions attached. Among those products were derivatives with high returns as long as stock prices rose; once stocks fell, the derivatives sank.
Shah said that historically, Citigroup’s private bank’s annual returns have averaged between 8% and 12% since the mid-1980s, when adjusted for inflation. Neither Citigroup nor its competitors UBS and Credit Suisse provide private bank revenue according to geography.
Charles Bok, CEO of the Singapore unit of Reyl & Cie, a Swiss wealth manager, said in the report that banks are less profitable because HNW Asian clients negotiate with money managers to lower their fees. Since the private bankers advise multiple customers and are not solely responsible for client portfolios, the HNW have the upper hand in the negotiations. BCG estimates that ROA for private banks in Asia in 2011 was 65 basis points; in Europe private banks took in 73 basis points.
Millionaires look on wealth managers with reserve. Asian millionaire Easaw Thomas, who lives in Singapore and handles most of his own money, was quoted saying, “There is a disparity between banks’ income requirements and clients’ interest. My general impression, after many rounds of disappointing performance, is that private bankers cannot be your lifeline.”
Thomas, who has used private banks since the 1980s, “grew up with little money in the house but after making money in real estate, allows wealth managers to handle less than 10% of his fortune and does not give his bankers full discretion over what they do manage. “They are essentially like secretaries who help facilitate a trade that you may want to make,” he said in the report. “I want complete control.”
Another HNW Singaporean, Clinton Ang, manages nearly $80 million for himself and three siblings, and said after firing two bankers and cutting the amount of family money handled by professionals to under 5%. Three years ago he used money managers for 25%. He was quoted saying, “I am very open to private banks for their propositions, but I want them to be relevant. We felt we could do better ourselves.”
Ang also said that he asks bankers whether they themselves have invested in the products they recommend, adding, “They need to be joint stakeholders. Otherwise it’ll be like selling me a vitamin that you don’t take yourself.”