Asian Clients Take Novel Approach Of Expecting Private Bankers To Make Money For Them

The Journal this morning has a sort of funny article whose gist is basically that Asia's new-money millionaires want actual performance from their private wealth managers and do unsporting things like split money among managers, demand products that offer impressive returns, and move money from managers who do a bad job to those who do a good job. You will not be surprised to learn that the bankers take kind of a dim view of this: While clients in the West want to increase their wealth, they also are concerned with keeping what they have by sticking to conservative investments, and focusing on estate- and tax-planning strategies. In Asia, clients also tend to be first generation rich, who want to make more money, rather than preserve it. They seek, as one banker said, "private brokers not private bankers." ... "I have one client who now has more than 10 private bankers, saying he doesn't want to depend on any one bank and risk his assets," said Kenny Lam, McKinsey's head of Asia private banking. "Asian clients are more interested in the next hot product rather than preserving wealth and are more likely to switch to the next banker with a better investment idea." Two and a half years ago the Journal ran what strikes me as a companion piece, about accumulators, which are an equity derivatives trade that banks sold mainly to Asian private-wealth clients and which revel in the nickname "I-kill-you-laters" because they do, and in 2008 they did. You can if you like connect the stories pretty effortlessly: Asian PWM clients demanded too-good-to-be-true returns, so banks happily obliged by selling them products with returns that were in fact too good to be true. And now they are demanding too-good-to-be-true returns and some banks are complaining because they can only offer mediocre-but-true returns, but others are probably just cooking up the next generation of delayed-death too-good-to-be-true products and not telling the Journal about it. Circle of life.
Author:
Updated:
Original:

The Journal this morning has a sort of funny article whose gist is basically that Asia's new-money millionaires want actual performance from their private wealth managers and do unsporting things like split money among managers, demand products that offer impressive returns, and move money from managers who do a bad job to those who do a good job. You will not be surprised to learn that the bankers take kind of a dim view of this:

While clients in the West want to increase their wealth, they also are concerned with keeping what they have by sticking to conservative investments, and focusing on estate- and tax-planning strategies.

In Asia, clients also tend to be first generation rich, who want to make more money, rather than preserve it. They seek, as one banker said, "private brokers not private bankers." ...

"I have one client who now has more than 10 private bankers, saying he doesn't want to depend on any one bank and risk his assets," said Kenny Lam, McKinsey's head of Asia private banking. "Asian clients are more interested in the next hot product rather than preserving wealth and are more likely to switch to the next banker with a better investment idea."

Two and a half years ago the Journal ran what strikes me as a companion piece, about accumulators, which are an equity derivatives trade that banks sold mainly to Asian private-wealth clients and which revel in the nickname "I-kill-you-laters" because they do, and in 2008 they did. You can if you like connect the stories pretty effortlessly: Asian PWM clients demanded too-good-to-be-true returns, so banks happily obliged by selling them products with returns that were in fact too good to be true. And now they are demanding too-good-to-be-true returns and some banks are complaining because they can only offer mediocre-but-true returns, but others are probably just cooking up the next generation of delayed-death too-good-to-be-true products and not telling the Journal about it. Circle of life.

Imagine what Greg Smith would have to say about this. One potential view of the banker-client relationship is that the banker provides objective advice and gets paid a modest-to-handsome, fully disclosed fee in exchange for his wisdom. Another is that the banker sells products in a competitive market where the client has ten banks on speed dial and is always looking for a better deal. That first model has a lot of appeal for clients, who are less likely to be swindled, but it has perhaps even more appeal for bankers, who can get paid well without even being particularly good at swindling. It's more or less the model of much investment banking business, from mergers to IPOs, where banks charge pretty customary fees and market themselves not on price but on providing the best objective advice, though of course even there most of what you hear about are the conflicts of interest.

But where you have a lot of customers who did not grow up in the tradition of large customary fees being paid to people who aren't even particularly good at swindling, clients who think (know?) that banking services are pretty commoditized and paying 2% for those services is kind of a rip-off, you can see why they'd be down for a move to the second model. This doesn't strike me as peculiarly Asian; it's just that there's a higher percentage of new-money PWM clients in Asia than in, say, Switzerland. You see some of the same dynamics in newer-money bits of the West, like Facebook paying relative peanuts for its IPO and not buying Zuckerberg a suit and sending him to swan around at the roadshow. Presumably the tradition unlike any other of paying banks 3-7% to run a self-recommending IPO appeals less to people who don't go back three generations with the family banker.

Anyway, in that second model of banks who compete on price and promises of returns, rather than on being trustworthy and objective and somber, explicit fees will be bid down to zero or zero-ish and the game is to build the thing that has the highest headline return, lowest headline fee, and highest hidden P&L. The I-kill-you-later is an example but there will be more. Many of them will be built in Asia. Some won't be. None will be built by Greg Smith but some will probably be built by his successor at the helm of Goldman's vast US-equity-derivatives-in-Europe business, who incidentally I hope will be one of you.

Does this suck for the Asian PWM clients? Meh, probably not. These stories suggest to me that there's a market of buyers and sellers there, where each side tries to take advantage of the other and has some successes and some failures. Yes, I-kill-you-laters did, but the more recent Journal article notes that PWM profits are 15-20bps of AUM in Asia vs. 25-30bps in Europe and the US. There's no a priori reason to think that Asian PWM clients are dumber than their bankers, or that in the aggregate they'll end up more screwed by shopping aggressively for competitive hidden-fee products than they would by passively taking flat fees and objective-but-just-possibly-lazy advice in a market ruled by tradition. They'll always at least be able to get a price check on their accumulators, tiny yay.

The people who might be screwed by this development are Greg Smith's poor muppets in Europe. From these stories, Asia PWM at a global bank sounds like a training ground for private bankers with better than average swindling skills, who every day pit those skills against clients who are tough to swindle just because they are price sensitive and can so easily get a market check. You move some of those bankers to a market where private-wealth clients have one banker, don't focus on price, and expect conservative objective advice, and they're going to have a field day. Eyeballs flying everywhere.

In Asia, Fickle Millionaires Vex Banks [WSJ]
Accumulators Are Collecting Fans Again [WSJ, August 2009]

Related

Facebook Will Take Free Money From Banks But Don't Expect It To Show Any Gratitude

The Wall Street Journal today discovered that universal banks that lend money to companies for cheap tend to want investment banking business in return for that lending and I guess that's a scandal: As the market for technology IPOs revs up and the biggest banks seek to capitalize on the size of their balance sheets, the practice of selecting underwriters that also provided loans is coming under focus, spurred by Facebook's IPO process. Critics of the practice say the choices aren't accidental and reflect the "you-scratch-my-back-I-scratch-yours" way that Wall Street works. Bankers, for their part, say they aren't allowed to make loans on the condition that they receive other business, but borrowers can use the loans as a factor in choosing underwriters. Some bankers say that lending is just one of the many services they offer companies. At Facebook, the credit line played a role in the batting order for underwriters, said a banker who worked on an underwriting pitch to the company. When I was young and naive and pitching for underwriting business against banks that did lots of lending, I always thought that banks "aren't allowed to make loans on the condition that they receive other business, but borrowers can use the loans as a factor in choosing underwriters" thing was ripe for a scandal. I still sort of think that: I just do not believe that no client coverage banker has ever said "we'll be in your credit facility but only if you promise us underwriting or M&A business." (Some people agree with me!) And, as the Journal notes, that would be a criminal violation of the antitrust laws, which is unspeakably weird but there you go. But if you ask a banker who has been carefully and recently briefed on anti-tying regulations, he will probably tell you something like "we don't demand underwriting business to provide a loan. Companies demand loans to get underwriting business." And, as the Journal says, that's not illegal.

Banks May Have Trouble Taking Full Advantage Of JOBS Act's New Opportunities For Deceiving Clients

My time in the financial industry entirely postdated the global research settlement, which means that I have a different view of sell-side research from some of the olds. As far as I can make out, there are people who think that investment bank research was once a demonic scheme in which research analysts - larger-than-life figures whose recommendations were irresistible to the retail investors who in this vision bought all of every pre-2003 stock offering - swindled those besotted retail investors into buying crap stocks at inflated prices so that the banks could get gigantic investment banking fees. Whereas I always thought that investment bank research was a sort of cute endeavor of unclear commercial purpose, taken skeptically by the institutional investors who buy most of every post-2003 offering, made fun of by bankers, and conducted by people whom we never saw because, among other things, our network was set up to prevent them from emailing us and vice versa. Perhaps before the settlement giants roamed the halls of research divisions, defrauding investors with abandon, but once their email was cut off from the bankers' email they retreated into mousy irrelevance? Unclear. In any case THEY'RE BACK BABY, sort of:

One More Thing For Governance Day

Felix Salmon put up a great note from a reader about investment banking conflicts; it's fantastic so go read it. But this is a tiny bit unfair: You and many other commentators seem to have some misconceptions about what exactly large, sophisticated clients such as El Paso’s board hire investment bankers to do. Its always funny how, in the minds of pundits everywhere, those conniving and all-powerful one-percenters who sit on corporate boards become impotent and completely incapable of independent decision-making once an investment banker walks into the room. The basic argument is that repeat-player investment bankers provide value not by telling brainless executives whether to accept or reject a merger, but by providing intelligent decisionmakers with access and relationships, and relationships come with conflicts. As he says: When sophisticated clients (management teams, company boards, PE funds, etc) hire M&A bankers, they typically hire them for two main reasons (in addition to the legally required shams referred to as “fairness opinions”): Execution and Connections. Of those things, connections are higher-value and inextricable from conflicts. If you're hiring someone to sell you to Company X, a bank who has done work for Company X - heck, who owns 20% of Company X - is the bank you want. And sure maybe their "conflict" will cause them to advise you to sell for a lowball price so that Company X appreciates them more but, hey, nobody's forcing you to take their advice. So, yes, this is all true. But he's maybe a little too harsh on the commentators and their misconceptions.