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The Asian Banker – Changing focus in private banking scene drives need for better portfolio management

Posted on: June 17, 2012

The Asian Banker – Changing focus in private banking scene drives need for better portfolio management

Changing-focus1

Figure 1. HNWI distribution, 2007-2010 (by region)

 

Without a doubt, wealth management and private banking are big businesses. In an international ranking of wealth managers published in the International Private Banking Study of 2011 by the University of Zurich, total market volume of wealth managers by Asset Under Management (AUM) stood at $42.7 trillion in 2010, with the top 20 wealth managers holding 16.6% of that amount. Every year, millions enter into the HNWI category due to the rapid growth of family-owned businesses in emerging economies of Asia, as the new rich replace the old. However, it is important for banks eager to tap into this area to note that the characteristics of Asian HNWIs differ from their counterparts in the West.

Asian HNWIs tend to be younger and more focused on wealth creation as opposed to wealth preservation. Many of them are successful business owners who are more ambitious and willing to take risks. One feature that stands out is the inclination for the Asian rich to keep their own counsel when it comes to managing their money. The growing size of the global ETF market, which has increased from $40 billion at the end of 1999 to $1 trillion at the end of 2009, is an indicator of this trend.

The largest numbers of millionaires are in Asia, and there is an estimated $11 trillion of unmanaged wealth in emerging Asian economies. Banks are beginning to recognize that this represents a great opportunity to be exploited, with Julius Baer being one of those and expanding into the region with a series of office openings – Singapore in 2006, Jakarta in 2008, and Shanghai in 2011.

As financial institutions compete for a piece of market share in this highly lucrative business, there is a need for them to build up robust portfolio management processes, software and teams in order to meet the diverse requirements of their clients. Portfolio management involves decisions on asset allocation through the matching of risk profiles with appropriate investment mix and policies based on individual client’s investment objectives.

 

Portfolio management software aids customization of risk profiles
Portfolio management software is useful in helping financial institutions in customizing risk profiles for their clients, especially for the Asian rich who are more involved in managing their wealth. Robust portfolio management software needs to have the flexibility of meeting clients’ unique requirements, as each client’s time horizon, risk tolerance, as well as tax conditions differ. As each asset class (equity, fixed income, derivatives, real estate, etc.) have their respective risk characteristics, the software must be able to compute and utilize relevant algorithms customized to meet clients’ needs.

 

Regulatory requirements drive need for cost-efficient portfolio management solutions
Private banking clients are becoming increasingly demanding, as well as risk and performance conscious. Swiss banks have experienced a drop of gross margins from their wealth management divisions at about 20% from 2004 to 2010, due to pressures on tax compliance and banking transparency. Hence, there is an increasing need for cost-efficient solutions on the part of financial service providers to minimize costs while serving their clients. All these mean that portfolio management software will need to be both cost-efficient and possessing the flexibility to cater to diverse clients as well as cost-efficient. This is where Software as a Service, has an added advantage. Customers are typically charged according to their level of usage of the software in the form of monthly fees.

“An area where we saw success in the past, is when organizations have strong growth plans and ambitious visions, but requires a product that is complex and expensive. We have a unique selling proposition, where we provide complex product but sell it as a service, just like electricity. So as their business grows, they pay more,” explained Jean-Luc Freymond,chairman and chief executive officer, SAGE Group SA. Prospero, the firm’s wealth management solution suite has been successfully implemented at ADCB’s Wealth Management Group and Kuwait-based Global Investment House. SAGE is currently focusing on providing wealth management solutions in the Southeast Asian region, Singapore in particular.

The changing focus of wealth management from Europe to Asia; from the traditional Swiss private banking offshore centers to financial offshore centers in Asia, coupled with the increasingly diverse needs of customers, require better portfolio management by financial providers. Financial institutions will need to do so in order to remain relevant in the eyes of their clients.

 
*This article was written by Levina Lim of The Asian Banker on 15th June 2012.


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