“In the past, private banking would have a lot more products available than retail. But after the financial crisis, the regulatory landscape changed. Banks now have a bias toward offering [Securities and Futures Commission] authorised products.”
Selection criteria
Mak heads the advisory department, which serves as the product gatekeeper for the bank. It does not deal with clients directly, but with internal customers — the private and retail bankers — providing a general idea of the preferred funds.
He also works with investment counsellors, or ICs, who often accompany relationship managers to meet with clients and present recommendations.
BEA has 400 funds ready for distribution on its shelf, which includes all the well-known names such as Fidelity, BlackRock and JP Morgan. The bank also offers BEA Union funds, which are managed by BEA’s asset management company in a joint venture with Union Asset Management, a Germany-based firm.
However, the bank adopts open architecture approach, and out of 400 funds on the product list, BEA Union accounts for about a dozen, Mak said
Recently, BEA has put on its distribution list the Pictet Clean Energy fund and Pictet Digital Communications fund.
Mak said that criteria for selecting funds includes fund size, performance, whether it’s an absolute return base or a relative one. Also important are performance consistencies, peer ranking, whether the fund is in the first quartile, the investment strength of the manager, product features and the investment trend.
The selection process then continues at the bank’s quarterly investment outlook presentations, where the fund selection team discuss and debate the outlook for the next three-six months.
Finally, a proposed asset allocation plan is formed, which is given to the relationship manager, who discusses it with the client, taking into account client needs.
Due diligence tedium
To get on BEA’s approved product list, the bank conducts a product due diligence exercise, which is very tedious today due to all the compliance regulations, Mak said.
The due diligence covers the fund house and its management team, the fund manager and his track record. On top of that, his team produces a due diligence report on the product itself.
“For example, Fidelity could be on our approved vendor list already. But Fidelity might be offering 20 products. We pick and choose the ones we want, but for each product we pick, we need to do due diligence on that fund specifically.
“Because of all the due diligence requirements, we need to ensure first that the sales people have a strong buy in and commitment to market the fund.
“Otherwise, it doesn’t make much sense to go through the lengthy exercise and at the end of the day we can only channel in, say, a half million Hong Kong dollars. So we try to be a bit selective.”
Product due diligence on average takes a few months compared to pre-crisis days, when a bank would do some standard checks and sign a distribution agreement, he added.
Regulatory landscape
Mak’s biggest concern is regulation. Post-Lehman, the regulatory landscape has dramatically changed, and all private banks have to respond.
“The selling process is getting lengthier with a lot of risk disclosure. Regulatory hurdles are getting tougher for banks and intermediaries.”
Before the financial crisis, if a private banking customer wanted to buy a hedge fund not authorised in Hong Kong, the bank could still buy it for him via the “execution-only” or “reverse enquiry” approach, charging, for example, 2%.
The contract was signed and that was it, he recalled.
Today, regulators have a different view on the “execution-only” model. As long as the bank gets certain monetary benefits, commission or a front-load charge, the bank is responsible for the product due diligence.
Therefore, to serve the client the entire due diligence exercise is necessary: understanding the manager, the company, the products, and not as a one-off task, but ongoing.
“Today if a client wants to buy something not on the fund list, chances are the bank won’t do it because the bank has to balance out between the resources spent versus the potential income being generated.”
