Last week, Deutsche Bank Wealth Management announced that it has generated positive absolute returns in more than 95% of its wealth discretionary strategies. Gaining traction for discretionary portfolio management has been an uphill task in Asia, however, because clients are typically first generation and don’t want to give up control over portfolios.
While appetite for DPM in Asia is low, wealth managers are pushing the strategy to offset the dwindling appeal of the advisory model, where returns are falling and regulations are multiplying.
‘The focus in the last two decades has been on the constant churn and not on the long term picture and I think that’s what going to change for multiple reasons,’ Bhaskar Laxminarayan, Asia CIO at Julius Baer told Citywire Asia.
‘In the past, the overall return profile was large so every time you transacted, you lost a little bit because of market impact, cost of transaction etc.[The returns were] 12-15% in the 1990s and early 2000s. Now, capturing 6-8% with the same two or three trades [per day] is ending up being a value destroyer.’
Like Deutsche Bank Wealth Management and Bank of Singapore, less than 10% of Julius Baer’s private wealth portfolios are managed on a discretionary basis.
Christopher Blum, head of investments, Asia at J.P. Morgan Private Bank also believes that returns from risk assets going to continue to be limited, ‘so the percentage of returns you’ll get from alpha from active management will be more important.’
J.P. Morgan Private Bank has a relatively high discretionary-advisory split of 50-50 in the region. It competes with Lombard Odier – at about 65% - and Pictet Wealth Management at 30%.
Another concern for private banks operating advisory models is the clampdown on fees and increasing disclosure requirements from regulators as well as cross-border trading oversight and questions on investor suitability. The trading fee income has also been under pressure for many wealth managers operating on the advisory model.
Discretionary mandates give full control of the investment process to an asset manager for recurring fees that are high – and disclosure requirements are not in place, even in Europe, where the DPM model is much more entrenched.
In the UK, for example, clients have to pay wealth management service fees, plus value added tax -- Singapore and Hong Kong have no sales or capital gains tax on investments. The fees grow as the assets under management swell.
Clients also need to pay fees for the underlying funds in the mandate, in addition to charges for insurance and pension wrappers, which are not always disclosed. Some wealth managers also have flat transaction fees or a commission structure that need to be taken into account.
Aside from fee considerations, discretionary portfolios also help private banks capture a theme that will dominate the private wealth market in the next two decades – the passing of the baton from the first generation to the next.
Two trillion dollars are expected to change hands in billionaire families by 2040, according to UBS estimates. For Julius Baer’s Laxminarayan, as wealth transitions, maintenance and preservation became more important than growth through constant trading for the next generation. ‘Due to this, the number [for discretionary mandates] is possibly going to triple over the next decade.’
Indeed, Laxminarayan believes that as families and individuals grow richer and more sophisticated at investing, so will the demand for discretionary. Many other private banks are also targeting the ultra-high net worth segment for this reason. ‘In focusing on the more ultra-high net worth space, there is a greater belief given the level of sophistication that multi-asset class portfolios and the benefits of diversification offer are [better] understood,’ said Blum.
Diversification is a key selling point of discretionary portfolios because the investment manager has full control, allowing them to diversify into direct securities and funds. Clients could have a certain inherent investment biases based on past experiences.
Deutsche Bank WM is also targeting the high net worth market in the belief that they would want a professional portfolio manager at the private bank to manage the investments as they don’t run family offices.
‘That’s a range between $5 million and $25 million in assets. We think we can increase our penetration in that area because they probably don’t have family offices running their investments,’ Tuan Huynh, Asia-Pacific CIO and head of discretionary portfolio management said in an interview.
In terms of strategies, some private banks such as Bank of Singapore and Julius Baer have found that clients in Asia prefer seeing the names they are holding across asset classes, so single line investments tend to be more popular. Others, such as J.P. Morgan Private Bank, try and innovate in the funds space to enhance returns.
‘With HNWIs, they want to see more transparency. So especially during a sell-off, they want to see which line items have not done well. With funds, there’ll be another layer of fees,’ Tang Hsiao Ching, head, advisory and sales, managed investments at Bank of Singapore told Citywire Asia.
Whichever the strategy, like her peers, she believes DPM allows for longer-term investments that block out market noise – and that the benefits are higher if clients hold the portfolio through at least one market cycle.
‘Many clients have short horizons and after three years, they pull out at the worst time. According to our internal research, our discretionary portfolios have performed much better than advisory over the past three years,’ she said.