WEALTH’s Essential Guide To Choosing An Independent Asset Manager

Investing

WEALTH’s Essential Guide To Choosing An Independent Asset Manager

In this edition, we make a case for Independent Asset Managers. We explore them as an alternative to traditional banks and how their model and client offering differ.

Published on 5 September 2018

In this guide, you will learn:

 

– What an independent asset manager can do for you.

– The key factors to consider when choosing an independent asset manager.

– The step-by-step process you should follow when choosing an independent asset manager.

What can an independent asset manager do for you?

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Independent Asset Managers (IAM) offer wealth management services that are independent of a private bank. Most independent asset managers started their careers as private bankers. As a client, you will get the advantage of their experience and the network of contacts that they have established in the financial services industry.

The primary benefit that clients get from dealing with an IAM is that you have direct access to the individuals who own and operate the firm as well as close contact with the portfolio managers. This is a more personalised experience compared to dealing with a large private bank, where private bankers typically oversee a much larger number of clients.

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If you retain the services of an independent asset manager, you can expect to receive the following services and benefits:

  • Independent investment advice that is in sync with your risk profile and your expected rate of return.
  • The option to work closely with the IAM’s portfolio managers to build a portfolio that suits your needs.
  • A transparent fee structure.
  • Access to institutional-class investments. While the product may not differ to those offered at retail level, the upfront sales charge and ongoing management fees charged to the investor will differ significantly.
  • Highly personalised service and impartial advice on investment options.
  • Consolidated reporting. The convenience of dealing with your independent asset manager for your entire asset portfolio, which is especially useful if you have investments spread across several private banks and institutions.

Many independent asset managers provide additional services as well that include trust planning, direct investment opportunities, and multi-family office services.

How is this different from what a private bank does? It’s important to remember that the responsibility of an individual who works for a private bank is to the organisation. There are revenue targets to be met and the salespeople in a private bank are constantly under pressure to increase business volumes.

Key factors to consider when choosing an independent asset manager

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It’s advisable to consider appointing an asset manager only after you have confirmed that the firm that you are proposing to deal with is registered with the appropriate regulatory authorities. Most well-regarded firms are also members of the local self-regulating bodies.

Here are the key factors that you should consider when evaluating prospective independent asset managers:

1. Size

Large asset management firms score over their smaller competitors on several counts. The in-house portfolio management expertise that a client will have access to will usually be stronger. In addition to this, it is likely that an independent asset manager that has assets under management of several billion dollars will have access to a wider range of products and investment options.

But you should not restrict your choice only to those firms that have many clients and which manage a large book of clients monies. You may do equally well, or even better, with a small firm.

Why is that? Firstly, if your portfolio is small relative to the size of the firm, your account may not get the attention that it deserves. The advice that you receive may not be personalised. This could result in your funds being allocated in a manner that doesn’t match your risk profile or your needs.

The approach that you should adopt is to have an open discussion during your initial meeting with the representatives of the firm. First, determine if you are engaging them for a discretionary or advisory mandate and how well their model portfolios have performed. Ask them to clarify how the communication process will work and if their senior staff will be accessible. The decision to sign up should be taken only after you receive a satisfactory response to your queries.

2. Range of services

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An independent asset manager can offer several types of services. Obviously, asset management will be the core activity. This will include building an investment portfolio consisting of equities, fixed-income securities, forex, exchange-traded funds (ETFs), mutual funds, commodities, and structured products.

You may also be able to get access to direct investment opportunities and alternative investments. Many asset managers also offer additional services that include retirement planning and family office services, and can engage the services of trusts specialists and tax advisors if you require.

It’s likely that you will need only some of the services offered. When you choose an independent asset manager, you should ensure that you select one that has expertise in the relevant areas that are of interest to you. Don’t make the mistake of thinking that the firm that offers the widest range of services will be best able to meet your needs.

In fact, a specialised manager who offers a limited range of services, but who has a high degree of expertise in your targeted activity, may be the most appropriate choice.

Regardless of the size of the firm or the number of different services on offer, there is one distinct advantage of dealing with an independent asset manager. You will receive objective and unbiased advice regarding the type of securities that you should purchase.

Additionally, the purchase and sale transactions, and the custody of the securities thereafter is separated from the portfolio management activity. This gives the asset manager the freedom to select the most efficient securities brokerage firm or bank custodian for you.

3. Investment strategy and approach

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It is absolutely essential that the asset manager you deal with understands your consolidated asset holdings, which could be spread over several private banks and accounts. What are your specific instructions regarding your portfolio? Is asset preservation your primary goal or are you willing to take on a high degree of risk to earn a greater rate of return on your investments?

Ideally, your independent asset manager should provide you with a comprehensive document that gives details about the investment strategy that you have agreed upon. It is then up to the asset manager to ensure that there is no deviation from the principles that have been laid down.

But clients need to play a crucial role in this process. Keep a tab on how often securities are sold and purchased in your account. If the portfolio is being churned rapidly, you should ask for an explanation. Each sale or purchase of securities incurs transaction costs. These can add up over a period of time and have a negative impact on your returns.

Of course, you can’t avoid transaction costs and it is inadvisable to limit these if the market situation requires a portfolio rebalancing or calls for a particular security to be sold. It may well have been the sensible decision to exit from an investment that was performing poorly and reinvesting the proceeds.

But a high turnover may be a sign of a short-term approach, and it is definitely worth discussing this issue with your asset manager. When you are in the process of interviewing prospective asset managers, you should definitely raise specific questions such as the percentage of your portfolio you can expect will be churned each year, as well as the transaction costs involved.

4. Minimum investment amount and portfolio performance

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Most independent asset managers stipulate a minimum investment amount that is in the range of US$1 million. Try and ensure that you are not among the firm’s smallest clients. This may mean that your account could get a lower degree of attention.

After you have identified the firms that meet your investment amount criteria, it’s time to narrow down the list by concentrating on the performance of the asset managers. Ask the shortlisted firms to provide you with their model portfolio performance data for clients that have a similar risk profile as yours.

Of course, they will redact the name and other details that could identify the client. But the information that you are provided with will help you to estimate the capabilities of the asset manager. Try and ask for performance reports that provide data for an extended period. Five years or more is ideal.

It’s also important that you don’t view the asset manager’s model portfolios in isolation. Compare the performance with similar risk strategies and the market. For example, if a broad-based stock index increased by 20% over a certain period, the asset manager’s performance should be compared with this.

5. Fees

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Although the amount that you will have to pay in fees should definitely be an important consideration when choosing an independent asset manager, it should not be the deciding factor.

Where the Independent asset manager fee model can be extremely attractive to the client is when the fees are charged on a fixed fee basis, usually a percentage of the Assets under Management (AuM). This fixed fee could be in the 1% range, but that’s not a universal rule. Fees could be lower for large accounts.

There is much discussion around retrocession fees that are typically paid out of clients’ monies. These are finders fees that product distributors pay to asset managers. Be sure to ask the IAM how they report earning from this these retrocessions, rebates or trailers. If the IAM passes through these fees back to the client and only charge a flat fee, you stand to benefit from a true alignment of interest.

If you find an asset manager who ticks all the boxes, but is relatively expensive, bear in mind that the superior performance of their proposed portfolio can outweigh the negative impact on your returns from the higher fees that you are charged.

However, there is one precaution that you must take. Ask for a statement of charges before you sign up. This will ensure that you don’t get any unpleasant surprises. It could also help you to choose between two asset managers who seem to be equally matched.

How to choose the right independent asset manager for you

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Step 1: Draw up a list of your financial goals and estimate the amount that you plan to invest. What is the sum that you will allocate immediately and how much will you add over the next, say, one year?

Step 2: Ensure that you have clarity about the services that you would like your independent asset manager to perform.

Step 3: You can now start the exercise of looking for an independent asset manager.

– Search via WEALTH – Asia’s leading online marketplace for investors – to compare independent asset managers. The website’s recommendation engine will suggest 3-5 independent asset managers that would be a good fit for you.

– Visit the websites of the firms that have been shortlisted. See if the services that they provide match your requirements. You should pay special attention to the minimum investment amount that is stipulated. It’s also important to ascertain the length of time that the firm has been in existence.

– Carry out a quick internet search at this stage. Are there any negative comments or complaints about the firms that you are considering?

Step 4: You are now ready to begin the actual selection process. Set up meetings with the most likely 2-3 candidates. A one-on-one interaction with the representative of the firm that you are considering will play a key role in your decision.

– Keep a list of your queries handy. When you raise your questions, listen to the responses carefully. Do they address the issue that you are raising? If you are unable to get a satisfactory reply, does the person you are speaking to promise to get back to you with the required information? More importantly, do you actually get a response as promised?

– Remember that it is important to develop a sense of trust with the firm that you engage. Are you comfortable with the person that you are speaking to? You should proceed to the next stage only if this condition is satisfied.

Step 5: Choose the independent asset manager that you think is right for you.

The bottom line

Selecting an independent asset manager can be difficult as you will probably have to choose between several seemingly equally qualified candidates. How can you make the right choice?

You should definitely give great importance to an asset manager’s long-term performance track record. Someone who has consistently delivered high returns in the past is likely to continue performing well.

Another key feature that you should look for is communication skills. Is the asset manager willing to devote the time to understand your needs and devise an investment strategy that meets them? You definitely don’t want someone who will invest your funds without taking your requirements into account.

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