External Asset Managers: A Closer Look

Personal Finance

External Asset Managers: A Closer Look

Chiara Bartoletti, Chief Operating Officer of Oclaner Asset Management, explains what makes external asset managers unique and discusses what they can do for you.

Written by Oclaner Asset Management on 1 December 2017

Nearly a decade after the collapse of Bear Stearns in the spring of 2008, financial institutions still remain one the least trusted sector. The global financial crisis opened an unprecedented era of ultra-low interest rates and tectonic regulatory changes that have been challenging for the entire wealth management community.

On the back of this scenario, many predicted that small players, such as external asset managers (EAMs) wouldn’t survive – but, contrary to expectations, their numbers grew. In fact, in Singapore alone the assets under management (AUM) by EAMs is estimated at around 5% of the total local AUM – which equates to US$100 to US$150 billion.  This is quite a feat for an industry that was virtually non-existent 10 years ago in Asia. So who are these strange animals, EAMs, and why do they matter?

Aligned interests

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The EAM concept is simple: a standalone company that is independent of banks. This “outsider” notion is fundamental because it gives EAMs the advantage of having aligned interest with their clients.

Here’s how it works in practice: the client opens an account with a private bank where his or her assets will be held, and simultaneously gives a limited power of attorney to manage his portfolio to his external wealth manager of choice. EAMs cannot withdraw or transfer funds. They are essentially investment professionals who specialize in the art and science of asset allocation.

EAMs are typically not compensated based on how many times they flip your portfolio or on the products they sell you. Instead, they are generally remunerated based on a fixed percentage management fee (although some managers might have a different remuneration model). Their only incentive and their only way to survive is to deliver consistent and solid performance year after year. It is in their direct self-interest to do so.

External wealth managers do not physically hold your assets, this gives them the flexibility of choosing the best custodian institution based on each client’s unique requirements be it location, lending, or leverage capabilities. As a result, there is no risk to the client’s assets in the event the wealth manager goes bust. In addition, they have access to institutional services and pricings.

A wealth of choices

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External asset managers offer highly personalised and tailored services that can vary greatly between service providers. For example, some have a strong focus on a particular sector like real estate or on an asset class like fixed income. Some EAMs specialise in servicing particular groups of people – perhaps in a specific location or with individual needs. For instance, a professional athlete who earns large sums in limited span of time might not have the same management needs as entrepreneurial families.

Regardless of the services offered, investors should make sure that their trusted advisor is properly regulated by the local authority. In Singapore, external wealth managers are required to hold a license for fund management issued by the Monetary Authority of Singapore (MAS). This license allows them to actively manage the funds of accredited investors only. The regulator has set the bar high, putting investors’ protection at the core of everything and closely scrutinising all players.

The bottom line

In a world where financial products are often pushed, packaged, and commoditised, external asset managers offer very diverse services. Choosing your asset management professional is ultimately a personal decision, which involves striking the delicate balance of trust, investment philosophy, product offering, and chemistry.

Perhaps EAMs are one of the last true manifestations of “positive self-interest” in the financial world – they have a skin in the game, they own their business, and their client retention is intimately linked to their performance.

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