“Many clients think they’re overpaying for third-party fund managers, but we don’t believe that,” James said.
“More than anywhere in the world, fund managers in Asia do add value. When things aren’t so clear, they visit the company and see what the [operations] look like and what the management is like. The interaction they have with these companies adds a lot of value.”
A fund manager looking into a US company that is open and public does not carry the same value proposition, he said.
External choices
James is the front office connection in Asia for the Switzerland-based private bank. He deals directly with clients in conjunction with relationship managers on a day-to-day basis, listening to risk appetite needs and discussing what the bank can and cannot offer.
Due diligence and fund selection are done at the bank’s headquarters in Geneva by global teams, who develop a focus list of roughly 180 funds. James can influence fund selection if he finds products that would meet client needs or market demand in the region.
Third-party fund managers that fit the bank’s risk profile offer a better sharpe ratio and return than ETFs, James said.
“We look at the risk of the individual fund managers because we use a risk-based approach and we’re allocating risk to specific sectors whether it’s asset classes or individual equity sectors.
“We allocate based on the risk of the underlying assets rather than just capital allocation or making big bold calls on the market, which is what most banks do. Risk and return are managed together. It’s a more controlled method of managing client portfolios for a good solid consistent return with someone looking at the downside.
“Given that tradeoff, we are not trying to outperform anyone in a given year. But over the longterm, a minimum three-year investment will bring consistent returns with low volatility and low drawdown.”
Internal benefits
Third-party fund managers are used to complement funds from Lombard Odier’s asset management business or to fill gaps where the bank does not have expertise, he explained.
The bank uses an open architecture approach and about one-third of the funds in a typical client’s portfolio mix are internal products.
One advantage of internal asset management is the close contact with the portfolio managers, involving one-on-one meetings or videoconferencing, he said. “We hear what they are doing directly and often when it happens.”
Portfolio managers also meet with clients to explain investment strategy or particular issues, providing a level of comfort that helps sell the fund, James said.
“Sometimes a message directly from the portfolio manager is more effective than me recommending a good external fund to a client.”
Discretionary philosophy
In Asia (and globally), about half the bank’s private client assets are managed on a discretionary basis, well above the industry average of 4-5%, James said, citing a report from BCG Global Wealth 2013.
In Japan, the business is all discretionary.
“Asian investors realise it is not an easy proposition to outperform by picking individual stocks or bonds. They would rather hire a professional to do it for them.”
He said the bank may use discretionary account performance as a benchmark for individual advisory account clients.
“We’ll compare an advisory portfolio with what we are doing internally on discretionary. Not only overall performance but individual investments. If the advisory portfolio is up 3% and my discretionary is over 6%, I’ll talk to the client and see if he thinks we should put it in a discretionary account.”
The bank aims for discretionary client accounts worth up to $20m. Lombard charges fees for its discretionary services and only smaller advisory accounts use the commission model, James said.
Client migration toward discretionary accounts he expects to continue. In addition, increasing pressure on on trailer fees and a stricter regulatory environment are accelerating the change from advisory to discretionary relationships.
“Regulators are saying that hiring a professional to manage your money is a very good relationship to have. The individual trading relationship between the RM and client opens up a lot of concerns and communication issues in terms of risk profiling and what can be sold.
Most banks want to move more into discretionary accounts but are constrained by size. “When banks are big, it’s hard to change the DNA of an institution.”
