DPM – whereby a professional money manager runs an investment portfolio on a client’s behalf, based on a set of pre-agreed parameters – is the exception in Asia, where the bulk of private wealth is managed on an advisory basis.
Nonetheless, discretionary is attracting a lot of attention in the region, with many private banks looking to hire talent with a track record in this area.
But maintaining a full spectrum of services – including customizing mandates, checking portfolios daily against market risks and counterparty risks, executing timely trades and providing regular client portfolio reports – requires a big outlay of money and additional people, noted Grossholz.
There are broadly three forms of discretionary management: direct securities investment, multi-manager/fund-of-funds, and a combination of the two.
Many private banks – particularly their Asian businesses – don’t have the resources to run direct securities or even fund-of-fund portfolios, so often these services are outsourced to third-party managers. In fact, smaller players may ultimately end up focusing on one area – equities, for instance – given how labour-intensive it is to manage multi-asset mandates, said Grossholz.
Steven Seow, Asia head of wealth management consulting at Mercer, added that some smaller private banks manage discretionary portfolios even though they do not have the proper securities- or fund-selection capabilities.
“I’ve seen some firms not running DPM professionally – for example, not really sticking closely to their asset class allocation,” Seow said. “Sometimes I look at private bank discretionary offerings and wonder whether it might be better for [clients themselves] just to put their money into one multi-asset fund.”
According to UBS, its own Asia-Pacific DPM business – run by a 50-person team – saw a 40% increase in assets under management last year, and revenue was up 50% in the first half of this year compared to the same period in 2014. The bank declined to provide more specific figures.
One reason DPM is growing in popularity in Asia is because clients’ discretionary mandates have tended to outperform their advisory portfolios on a risk-adjusted basis, said Grossholz.
A shift to fee-based (rather than commission-based) selling of investment products, which is what happened in Australia and the UK, would also encourage take-up of DPM.
But Grossholz does not expect regulators in the region to ban commissions any time soon.
As a result, raising awareness of the benefits of DPM is key. For example, explaining the importance of geographic diversification and why trying to time the market is a practice best avoided.
“Providing information and educating clients are very important and are probably where we spend most of our time,” he noted.