The case for fee based model

Added 22nd June 2015

EXS Capital’s fee-based discretionary model is rare in Asia, but Jessica Cutrera, managing director of the firm's wealth management arm, believes there’s a huge opportunity for more.

The case for fee based model

Advisories in Asia tend to be more product focused than client-focused, Cutrera discovered after working for several years in Tokyo at an Asia-based IFA. She saw opportunity in a client-focused business and the transparent, fee-based model was the best approach. In 2007, she co-founded with Eric Solberg, EXS Capital in Hong Kong.

 Cutrera said the fee-based model gained traction after the financial crisis as people were unhappy with the service and fees they were paying to private banks. 

 “The least favorite part of my job is the unwinding I have to do for people who bought incredibly high fee products. Several years later, I have to explain why they are not making money: They were paid on commission here’s the annual fees and fund fees and on top of that it’s not performing. Those are hard discussions. [Fee-based] is just such a better business model.”

 EXS' client base includes expatriates, Chinese with international assets and local family offices. Typical clients have $2m-$10m in investible assets, but some have a few hundred thousand dollars. 

 The firm, which manages about $250m in discretionary money, does not take commission on investment products. The fee is 1% of assets under management, with no fees for entry, exit or performance, she added.

“We don’t see clamour for A-share exposure. Some clients view it as a tactical satellite play and we do that.”

Entirely ETFs

The firm's investment products are exclusively ETFs. Cutrera, who leads the investment committee, prefers ETFs over mutual funds because of liquidity, low-cost and performance. 

 She added that 90% of active managers don’t beat their benchmarks on a long-term basis. 

 “We’re not believers that stock picking works. It’s really about asset allocation as a return driver, particularly for fixed income. I’d rather buy an ETF and let Blackrock manage the acquisition of individual bonds and discounts and premiums. I’ll get a better consolidated portfolio and I won’t pay much for it.

 “Today you can find an ETF for just about anything and you save a lot of cost versus active managers. ETFs are a no brainer.”

 ETF client portfolios are designed according to factors such as time frame, risk tolerance and currency. The firm uses Interactive Brokers and Credit Suisse as custodians. 

 Cutrera has a bias toward physical ETFs which have underlying shares, avoiding synthetic ETFs (which use derivatives) due to their complexity, added risk and cost.

 EXS works with around six fund houses for ETFs. Most positions are with Blackrock, Vanguard or State Street. The firm also takes positions in products from Invesco and Powershares. 

Liquid portfolios

Currently EXS is underweight fixed income and within that category underweight treasuries and long duration debt. The firm prefers credit risk over interest rate risk and is focused on shorter duration positons. 

 “Even if things get rough around the rate hike, we keep duration low on the debt we own. We used floating rate and senior loan debt.

 “We’ve positioned portfolios to make sure make sure clients who need liquidity have got it. If markets do get choppy we won’t be forced to sell assets at the wrong time.

 The firm has been overweight on US equities, preferring value over growth stocks. With the weakening currencies in Europe and Japan, she expects to increase international exposure this year. 

 “We don’t see clamour for A-share exposure. Some clients view it as a tactical satellite play and we do that.” 

 The expat community in Hong Kong is generally nervous about what they see on a business level in the mainland, she said. “Investing in China is not yet particularly attractive.”

Business model opportunity

Only a handful of independent wealth managers primarily using the fee-based model operate in Hong Kong. For example, TTG Wealth Management, which has been in Hong Kong for more than a decade, is one, and there are family offices such as Alps Advisory. 

 “It’s a lonely space and there’s a huge opportunity for more. The high fee, high commission model is unfortunately the norm out here, but it’s detrimental to the industry.”

 Hong Kong regulators are moving in right direction, favouring the transparency that a fee-based model offers, she said. “In the US, Australia, the UK, the fee-based model is all you see.”


Cutrera is also leading the launch of the Hong Kong chapter of the Association of Independent Asset Managers, an organisation of independent wealth managers that promotes a better understanding of the business model.

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