Business | Banking

Asian millionaires take greater control of their wealth

Investment bankers lose discretion over portfolios as clients get disillusioned with returns and products

  • Bloomberg
  • Published: 09:21 August 6, 2012
  • Gulf News

  • Image Credit: Bloomberg
  • The Credit Suisse Group AG headquarters in Zurich, Switzerland. The move by millionaires to control their assets is translating to lower profits for wealth management firms.

Singapore: Clinton Ang, the grandson of a gunny sack seller who emigrated last century from China to Singapore, oversees a fortune valued at almost $80 million (Dh293.84 million) for himself and three siblings.

That makes him a target for wealth managers in Singapore, the private banking capital of Asia. Yet, the 39-year-old managing director of Hock Tong Bee Pte, which evolved from his grandfather’s sacks and foodstuff supplier into a purveyor of $6,000 Grand Cru wines, has already fired two bankers and prefers mostly to manage the money himself.

“I am very open to private banks for their propositions, but I want them to be relevant,” Ang, who’s cut the amount of his family’s money managed by professionals to less than 5 per cent from 25 per cent three years ago, said. “We felt we could do better ourselves.”

Disillusionment with investment products and returns has made Asian millionaires such as Ang take greater control of their wealth than rich Europeans. Managers at Credit Suisse Group AG, Citigroup Inc. and other banks in Asia have full discretion over clients’ portfolios for just 4 per cent of assets under management, according to a June report from Boston Consulting Group (BCG). That’s down from 7 per cent in 2006. In Europe, it’s 23 per cent, rising from 18 per cent six years ago.

“Asia’s wealthy lost a lot of trust in their private banks and private bankers during the 2008 financial crisis,” Peter Damisch, a Zurich-based BCG partner and managing director who co-authored the report, said.

Less profitable

For the top wealth management firms that have made big bets on expanding in Asia, the move by millionaires to control their own assets is translating to lower profits even as the pool managed by professionals continues to grow.

HSBC Holdings Plc, whose private bank had 25 per cent more assets in Asia-Pacific region in 2011 than four years earlier, earned less last year than in 2007, according to its annual reports. Net operating income for the private bank’s local operations in 2007 was $748 million on $26.7 billion in assets. In 2011, the same measure fell to $712 million even as assets managed rose to $33.5 billion.

That means, excluding expenses, the private bank earned $2.10 for every $100 of assets it managed in the Asia-Pacific region last year, a 25 per cent decline from 2007. That year was historic for market performance and turnover, Gareth Hewett, an HSBC spokesman in Hong Kong said, adding that he didn’t know whether Asia’s shift away from private banking was to blame for lower earnings.

Cultural differences

“The culture of Asia is such that clients are far more hands-on,” Akbar Shah, head of Southeast Asia and Australia for Citigroup’s private banking unit who cites the region’s accumulation of wealth as a reason behind the desire for control, said.

“Many of them have made a lot of money in the real estate markets in Asia, and these are hands-on markets,” Shah said. “Nobody can tell you — you need a feel for it.”

Asian millionaires, a large proportion of whom have made their fortunes rather than inherited wealth, demand high returns, according to Enrico Mattoli, who heads investment products and services for the richest clients of UBS AG’s Asia-Pacific wealth management unit.

Affluent Asians have an “aggressive” growth target of an annual nominal rate of 12 per cent for the next 10 years, Standard Chartered Plc and Scorpio Partnership said in a report in March after surveying more than 2,700 high-net-worth Asians in nine markets, including China, India, Singapore and Hong Kong. The report didn’t provide a comparative number for Europeans.

High returns

In the run-up to the global financial crisis of 2008, private bankers sold Asian clients products that earned high fees and commissions, such as derivatives with returns that soared when stock prices rose and plunged lower than the market when prices fell, Liew Nam Soon, a Singapore-based partner at Ernst & Young LLP, said.

Historic annual returns to global clients at Citigroup’s private bank have averaged about 8 per cent to 12 per cent since the mid-1980s after adjusting for inflation, Shah said. The New York-based bank and rivals UBS and Credit Suisse, both based in Zurich, don’t report private banking revenue by geography. The three, along with HSBC, are the top four private banks in the region by assets managed, according to Private Banker International, a publication which tracks the industry.

Slumping profits

Deutsche Bank AG, Germany’s biggest lender and among the top 10 private bankers in Asia, reported yesterday that pretax profit at its asset and wealth management division slumped 85 per cent to €35 million (Dh159.26 million) in the second quarter. UBS’ earnings from wealth management outside the Americas fell 25 per cent from a year earlier in the second quarter as lower client activity hurt the bank’s margins, it said yesterday.

UBS reported that assets managed in the Asia-Pacific region since the end of 2008 grew 27 per cent last year. Mattoli declined to answer questions about the impact of Asian millionaires pulling back their wealth on operations, revenue or profitability.

Asians’ portfolios are “heavily skewed” toward Asian markets where gains have outpaced the rest of the world, according to a February note from Shayne Nelson, chief executive officer of Standard Chartered’s private bank. In the 10 years through the end of June, the BSE India Sensitive Index had average annual gains of 20 per cent, compared with 26 per cent for the Jakarta Composite Index. The MSCI World Index climbed less than 6 per cent annually in the same period.

Negotiating fees

Banks’ profitability has declined partly because wealthy Asian clients negotiate lower fees to managers. Private bankers are under pressure to reduce them because they only provide advice to multiple customers, rather than bearing sole responsibility for the clients’ portfolios, Charles Bok, CEO of the Singapore unit of Reyl & Cie SA, a Swiss wealth manager, said.

Profitability has also fallen due to a drop in commissions on equity and bond trading, which have shrunk amid the global rout in capital markets.

“At the moment, people are not very active in the markets and because of that, trading revenues are down,” Boston Consulting Group’s Damisch said.

His firm estimates that return on assets for private banks in Asia was 65 basis points last year compared with 73 basis points for European institutions. A basis point is 0.01 percentage point.

Interest disparity

“There is a disparity between banks’ income requirements and clients’ interest,” Easaw Thomas, another Asian millionaire who manages most of his own wealth and declined to disclose the value of his portfolio, said.

Thomas, an anesthesiologist who made most of his money in real estate without the help of advisers, drives a S$700,000 (Dh2.06 million) Porsche 911 Turbo, owns a wine collection that boasts rare Burgundies, and lives in a 1939 Art Deco house in one of Singapore’s most-expensive neighbourhoods off Bukit Timah Road.

“My general impression, after many rounds of disappointing performance, is that private bankers cannot be your lifeline,” the 67-year-old Indian-origin Singaporean, who has used private banks since the 1980s, said.

Thomas, the son of a priest in the Mar Thoma Syrian Church of Malabar who immigrated to Singapore when Thomas was a child, said he “grew up with little money in the house.” After making a fortune buying and selling property, he now keeps less than 10 per cent of his money with wealth managers, he said, and doesn’t give bankers full discretion.

“They are essentially like secretaries who help facilitate a trade that you may want to make,” Thomas said. “I want complete control.”

His house was purchased for S$2.45 million in 1990 and is currently valued at about S$35 million, Thomas said. He bought his first house in 1976 for S$115,000 and sold it four years later for four times the cost.

High-net-worth individuals in Asia had the largest portion of their investable assets tied to property, at 31 per cent, according to a March report from Citigroup’s private bank and Knight Frank LLP. In Europe and Russia, the proportion was 16 per cent.

Property affinity

Ang, the wine trader by day, also made his first $1 million from property. When he was studying at Arizona State University in the early 1990s, he purchased 50 apartments of about 950 square feet each at $17,500 a unit in the US with money borrowed from his father. He sold the units for $90,000 apiece in 2000, he said.

In 2009-2010, when the MSCI Asia-Pacific Index, excluding Japan, gained 94 per cent, Ang said private banks earned him 20 per cent. Investments he made for his family’s wealth yielded 200 per cent, he said. An investment in a life-insurance policy in 2008 bought him $10 million of coverage. A comparable policy purchased today would provide $7 million, he said.

“I bought it before any private banker could tell me,” he said, adding that these days every private banker extols the product to him “five times over.”

Like Ang, most Asian millionaires are younger than their European counterparts and in the wealth-generating stages of their life, Simon Grose-Hodge, head of investment advisory in South Asia at Vaduz-based LGT Group, Liechtenstein’s largest bank, said.

More than 40 per cent of Asian millionaires are 45 or younger, according to a report from Capgemini SA and Bank of America Corp.’s Merrill Lynch unit last year. In Europe, less than 20 per cent of the millionaires belonged to that age group.

Standard Chartered said in the February note that 63 per cent of private banking clients are business owners, “mostly first- or second-generation,” and that the proportion was greater than in Europe.

Asian millionaires who run their own business tend to plow back most of their gains into expansion and seek higher returns from reinvesting, Grose-Hodge said. An Asian entrepreneur typically has 60 per cent of his net worth in his business, Citigroup’s Shah said. European millionaires primarily have inherited wealth, Dominique Joye, CEO of the Singapore unit of LGT, said.

Asia-Pacific millionaires outnumbered those in North America for the first time last year, according to a June report by Capgemini and RBC Wealth Management. The number of people with at least $1 million in investable assets in the region climbed 1.6 per cent in 2011 to 3.37 million, while high-net-worth individuals in North America dropped by 1.1 per cent to 3.35 million, they said.

Asia’s new millionaires also have a shorter timeframe for gauging returns generated by their bankers than wealthy European families, which have watched their net worth rise and fall over generations, Citigroup’s Shah said.

“In Europe, the tradition has been to give the private banker discretion,” he said. “The longer you give a portfolio, the better the returns.”

Ang said he asks bankers whether they themselves have invested in the products they recommend.

“They need to be joint stakeholders,” he said. “Otherwise it’ll be like selling me a vitamin that you don’t take yourself.”

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