wealthy Asians are ditching western wealth management products

…that according to a recent article by Bloomberg.

how so?

Two quotes in the article seem to me to sum up the situation:  “We felt we could do better ourselves,” and “There is a disparity between banks’ income requirements and clients’ interest.”

The conclusion doesn’t surprise me very much.  After all, Americans have been leaving traditional brokers for a do-it-yourself approach for years.  What is news to me is that wealthy Europeans appear to be increasing their reliance on wealth managers, not paring back their exposure.

unattractive products

There are two basic reasons I find most “sophisticated” wealth management products less than compelling.

the deal structure may be poor

In many traditional tax shelter products, for example, the upfront fees and commissions that clients, as limited partners, pay can be as much as 20% of the money they put in.

Their cash flow share is usually disproportionately small.  The general partner will contribute, say, 20% of the partnership assets but collects 40% of the cash flow.  The limited partner puts in 80% and collects the remainder.  The general partner’s contribution may not be cash, but rather assets whose appraisal value is open to question–something which could tilt the sharing of cash flow further against the limited partner.

the client may not get access to the best assets

Marketing materials invariably illustrate how the investor will hold equity in, say, fast-growing privately held firms in areas where foreign ownership is severely restricted.  The apparent promise is of extraordinarily high gains.  If, however, you examine the returns investors have achieved in the past from similar offerings by the same local promoter, they’re probably equivalent to those of the local stock market.  Lots of sizzle, then, but little steak.

pressure to cover high fixed costs

Traditional wealth managers can have surprisingly high fixed costs.  They will likely have offices in high-rent buildings.  They may have extensive administrative and support staffs.  Successful salesmen may have guaranteed contracts at high compensation.  As a result, firms may need to sell a lot of products each year–whether good deals are available or not–just to cover their costs and make a contribution to corporate overhead.  In a situation like this, the pressure is typically to push iffy deals to clients with fingers crossed in the hope they will succeed.

inherited wealth in Europe?

Why are Europeans content with at best so-so treatment?  I don’t know.

Bloomberg says it’s because wealthy Europeans tend to have inherited their money, and are therefore more patient (does this mean clueless?), while wealthy Asians (at least potential wealth management clients) are self-made men and tend to be less tolerant.

“good” families and “bad”

I’d offer a slightly different thought.

Anyone who studies Asian equity markets soon realizes that the region contains many family owned conglomerates.  Virtually always, the family will have its assets in both privately held and publicly held companies.  In all cases, the private company does better than the public one.  That’s just life.

What separates the public companies of “good” families from “bad” is how they treat minority shareholders in the public entities.  “Good” families will select assets/projects for the public to hold that have strong profit characteristics; “bad” families will select ones where they have already squeezed out most of the profit potential in the private company.  In the former case, the public investors can consider themselves sort of junior family members, maybe distant cousins.  In the latter, they’re just a disposal service.

I think wealthy Asian investors have concluded that western wealth management looks much more like the work of “bad” families than “good.”  They’re probably right.

European clients may not be as hands-on, and their more mature equity markets may not invite the same good company/bad company comparison.

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