The Wealth Management & Compliance Report, Asia 2014

VISION 2030 Wealth Management & Compliance in Asia, 2014

OFFSHORE FIDUCIARY SPECIALISTS IN SINGAPORE Collas Crill focuses on the growing demand for Channel Islands legal advice in private wealth, investments funds and corporate work in South East Asia, working with lawyers, banks, accountants, trust companies and fund administrators.

The head of our Singapore team, Marcus Hinkley, is a highly experienced trust lawyer with unrivalled offshore expertise from working in Guernsey, New Zealand, the BVI, and the Cayman Islands. Marcus leads a team focused on solutions to cross-jurisdictional offshore private wealth planning. Clients say we are:

“Personable and pragmatic - they find solutions to problems” “Technically strong with an emphasis on being easy to do business with” Speak to Marcus Hinkley about how Collas Crill can help your clients plan for their future.

Marcus Hinkley, Group Partner T: +65 6408 3385 E: marcus.hinkley@collascrill.com

/ services / banking & finance

/ ip & e-business

/ corporate & commercial

/ risk & regulatory

/ investment funds

/ trusts & foundations

Best Practice // Offshore Law Guernsey // Jersey // London // Singapore www.collascrill.com

Contents Compliance: The Legal Perspective

6

Compliance: The Industry Perspective

13

Risk Management in Asian Private Banking

18

Independent Asset Management in Asia

24

Discretionary Portfolio Management In Asia

36

Rise of the Chinese High Net Worth Individual

40

Technology in Asian Private Banking

46

EQ Connect by FinIQ

55

Business Process Outsourcing

58

Issues in Asia

61

The Asia Focus: DBS Bank

65

Trusts & Wealth Planning

68

Offshore Financial Centres & Regulatory Arbitrage

74

Produced by C.E.O. Financial Ltd, Dublin, Republic of Ireland.

Reg No. 362363 fdiChina.com Ph:+353 87 747 3779 Copyright 2014, C.E.O. Financial Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, without the prior written premission of CEO Financial Ltd. Whilst every effort has been made to ensure the accuracy of the information contained in this publication, the authors and publisher accept no responsibility for any errors it may contain, or any loss, financial or otherwise, sustained by any person or organisation using this publication.

Incorporated in Hong Kong and a Registered Trust Company under the Hong Kong Trustee Ordinance and the Hong Kong companies Ordinance, The Hong Kong Trust Company Limited provides professional trust, fiduciary and administration services to support high-net-worth private clients, family office, corporations and funds.

Specifically, The Hong Kong Trust Company provides trusteeship, custodial and fiduciary services for clients wishing to set up trusts or custody relationships for the protection of international assets, wealth planning, estate management and tax structuring, and also provides a full range of establishment and administration services to Investment Funds and Private Equity Structures.

Compliance & the Global Drive Towards Tax Transparency: The Legal Perspective

In 2010, the Foreign Account Tax Compliance Act (FATCA) was enacted in the US. The ramifications of the act however, have echoed far beyond the borders of the continental United States.

This well-drafted piece of legislation puts an obligation on financial institutions outside the US to identify any US citizens that may be clients, in an effort to sew-up the tax net. Of course, the IRS and the courts that enforce US law have no jurisdiction outside the United States. What they can do and are doing in order to ensure compliance however, is impose a 30% withholding tax on every dollar that is invested in the United States by non-compliant FFIs (Foreign Financial Institutions).

FATCA converges with the OECD’s Global Forum on Transparency and Exchange of Information for Tax purposes to creat a seismic shift in the entire offshore arena.

“The face of compliance is changing.

The introduction of FATCA in the US has been a decisive change in the landscape as it puts quite onerous obligations on financial institutions globally.”

Marcus Hinkley, Partner, Collas Crill

world is moving towards a more tax transparent system. Offshore jurisdictions in many ways became scapegoats of the 2008 financial crisis.

The OECD gained political leverage to push the agenda for the automatic “The face of compliance is changing exchange of information between globally. There are many different sources, but there is a consistent push jurisdictions. Now with FACTA, the legislation in the US involving the for greater regulation, transparency US Internal Revenue Service (IRS), and sharing of information between more onerous measures are being jurisdictions. The introduction of FATCA in the United States has been introduced that will have the result of a decisive change in the landscape as removing the cloak of secrecy from offshore banking altogether. These it puts quite onerous obligations on developments are so profound that financial institutions worldwide. The OECD is also a key driver in this area. other onshore jurisdictions are now requesting similar measures.

“As an offshore financial centre, “Many non-OECD jurisdictions are Jersey is ahead of the curve in now even signing up to the OECD terms of its regulatory regime. It convention. This global initiative is perceived as a highly regulated regarding automatic information jurisdiction which means that some exchange changes the offshore funds have steered clear of it in landscape completely because it order to avoid the more stringent enables governments to determine Anti-Money Laundering (AML) regulations. This is a bit short sighted who holds what assets and where they are held. The net effect is that though because it is clear that the Marcus Hinkley, Group Partner at Collas Crill, an offshore law firm that practices Jersey and Guernsey law explains that,

“The idea that one can avoid information disclosure and regulatory requirements by moving from one jurisdiction to another is an idea that has had its time.”

Marcus Leese, Partner, Ogier

“For the leading offshore centres, ensuring that the financial institutions within their jurisdiction are well regulated and compliant with AntiMoney Laundering (AML) legislation, was a difficult but very important step. But this has proved to be the correct decision. There are still some offshore centres that haven’t bought in to the need for regulation, but now With the introduction of international measures such as these, there has been that onshore countries are pushing for more compliance, it is inevitable that a considerable disparity in how they all serious offshore financial centres have been implemented by different will eventually have to come up to offshore jurisdictions. The OECD speed. There are a small number of for example, has awarded “Grade B Largely Compliant” to the jurisdictions jurisdictions facing sanctions from international bodies because they’re of Hong Kong, Singapore, Jersey, Guernsey, Monaco and the Cayman failing to implement what is required.

Islands, among others, whereas “There are two aspects to the issue Luxembourg, Cyprus and the British of regulation. The first is whether a Virgin Islands (BVI) have been jurisdiction has the appropriate laws labelled “Grade D - Non Compliant”. on its statute books and the second Marcus Leese, Partner at offshore law is whether they are actually applied. firm, Ogier discusses these disparities, It is this second aspect relating to implementation which is becoming tax evasion falls under AML laws and will now become the same offence in many jurisdictions. Evading tax in the UK for example, is now an offence in Singapore. This puts the noose around the neck of offshore as we know it. If a jurisdiction’s reputation has been built purely on secrecy, it will be no more.”

increasingly important. Today the vast majority of offshore centres have regulatory information exchange and AML laws on their statute books.

The phase we are now entering is greater scrutiny on the extent to which these laws are actually implemented.

We have begun to see a period of sustained pressure from international groups for greater and more rigourous implementation of laws, but nevertheless it will be a continuing progression.

“There is real differentiation between offshore centres, but the idea that one can avoid information disclosure and regulatory requirements by moving from one to another is an idea that has had its time. That is not planning, that is simply the legal equivalent of closing your eyes and hoping that the danger will go away. The momentum towards global tax transparency is such that those jurisdictions that are non-compliant will be forced out of business.”

“The key question is whether international pressure for increased disclosure and exchange of information will grow over time or subside. At the moment, there is still material variation between the level of regulation that different offshore centres have and an even greater differentiation in enforcement. Interestingly, it does remain the case that there are significant regulatory deficiencies and shortcomings in some onshore centres.

The complexities and far-reaching ramifications of FATCA deserve added scrutiny. Jay Krause, Partner at law firm Withers Worldwide outlines how his work has changed since the introduction of FATCA, “FATCA has been a playfield leveller.

It is now becoming more evident to clients and other third parties that they actually need to be compliant with their tax and reporting obligations. In years

past, some people would take the view that if assets were in a particular jurisdiction, then they would not pay any tax at all. This idea is simply not feasible anymore. From a United States perspective, individuals must be either completely compliant (it is possible to minimise tax liabilities to the extent permissible but they can’t make it go away) or they must exit the US tax system by renouncing their US citizenship and expatriating.

Increasing numbers are doing just that and many are now returning their green cards.

“We deal with a lot of Asian families, sometimes with longstanding US connections, particularly from the Peoples’ Republic of China. The first generation is particularly interested in the EB5 Visa, the terms of which dictate that an investment of USD $ 0.5 million - 1 million (depending on what it is invested in) can convert an investors’ visa into a greencard within one year. Very few of the people who do this however, are aware of the new tax and reporting issues associated with holding a greencard.

“FATCA itself does not create any new tax obligations. What it does is have the net effect of putting obligations on financial institutions to figure out the identity of US citizens on their books. There is not a direct link between the client and FATCA, the obligation falls mostly on the institution. This has had a massive effect on non-US custodian banks.

As a consequence, they have to dedicate a lot of time and resources to this issue. Some of these financial institutions are now saying that they don’t want to take on US clients because of the increased reporting and compliance obligations and this is becoming a big issue in Asia.

“Even so, FATCA affects all institutions, regardless of whether they have US customers or not, because they have to undertake a client identification process in a manner that is consistent with FACTA protocol, so you have to go through the process anyway, regardless of whether you have US clients or not.

The FATCA legislation was very cleverly drafted to encourage all nonUS institutions to participate because non-compliant institutions are subject to a 30% withholding tax on every dollar invested by that institution in the United States. It was very cleverly conceived.

“If a private client hasn’t been compliant, we can help them understand their options. The current version of the IRS programme allows people to become compliant by paying 8 years of back taxes and interest, in addition to a 27.5% penalty in lieu of any and all other penalties they could be liable for. In some cases, this can be seen as a sort of amnesty because if they don’t use this programme, the IRS may go back further than 8 years.”

“Institutions that serve private clients, namely banks and trustees have to make sure that their clients are compliant because regulators are now starting to penalise the institutions themselves.”

Michael Olesnicky, Partner, Baker & McKenzie Michael Olesnicky is a partner at law firm, Baker & McKenzie. The firm has a number of private clients, but focuses more on institutions. Olesnicky provides a synopsis of the regulatory situation and how it impacts business.

“It is important for industry players to understand that tax transparency is a given now. Secrecy does not exist anymore. When people make plans, they must assume that everything they do will become known to the authorities.

Institutions that serve private clients, namely banks and trustees have to make sure that their clients are compliant because regulators are now starting to penalise the institutions themselves.

“When this shift to tax transparency started five or six years ago, people started shifting money to Asia, thinking that Hong Kong and Singapore would offer secrecy. The clear message here is that this is not the case - Hong Kong and Singapore do not want to be perceived as tax havens and have introduced regulations that make them

as transparent now as Europe and elsewhere.

“There is a gradual shift taking place in this direction throughout the globe and families have to be cognizant of it and plan for it. Henceforth, everything will be under the spotlight. Rather than moving cash between institutions to hide funds, they need to use structures that comply. The challenge in this regard is for individuals who haven’t been compliant in the past. Going from black to white may reveal past transactions that arouse the interests of tax authorities in multiple jurisdictions.

“Tax authorities are looking at what was done in the past, but the approach taken can differ with the jurisdiction.

Some places have offered tax amnesties with reduced penalties for voluntary disclosures. This approach looks to wipe the slate clean and bring the money back to the country. Other jurisdictions however, take the position that those who have cheated in the past should be punished.

“The challenges for the banks here is that they’re in the firing line. The threat of prosecutions brought by the IRS in United States under FATCA have meant that banks have actually been at the forefront of the drive towards increased compliance. The problem they face is getting clients to accept this.

“Private banks can sometimes struggle with non-compliant clients.

Some banks have terminated a number of those relationships. The fact is that to become compliant is often complex and therefore more expensive, and at the end of it, there is either a significantly increased tax bill or increased fees incurred in structuring vehicles to avoid taxes, whilst staying compliant. Either way, the client incurs significant costs.

“Not all banks have become compliant yet, so we have to evolve to a level playing field. Private banks in Asia (Hong Kong and Singapore)

are generally very compliant though.

Neither government wants to be seen as non-compliant, so they have implemented good regulatory regimes.”

The legal environment is changing and adding new pressures to the offshore system. The industry has had the benefit of light-touch regulation for decades. It appears that its importance within the global economy has now been fully understood by national regulators and they are taking considerable steps to address the loopholes therein.

All sectors of industry come under increased regulatory scrutiny at some point, and oftentimes, depite entrenched resistance, change can have positive effects in terms of the reputation of the industry, the social contribution and a disassociation with undesireables.

The Burdens of Compliance & Tax Transparency: The Industry Perspective

Anti-Money Laundering (AML) regulations, the OECD’s continuing push for the free and automatic exchange of information and the FATCA clampdown by the US government on “Foreign Financial Institutions” (FFIs), have all taken their toll on banks globally. The increased resources that must be allocated to compliance functions in order to address these requirements are considerable. We spoke to a number of leading figures in different sectors of the Asian wealth management industry in order to ascertain their opinions on these issues and the extent to which they business is being effected.

for the industry in terms of increased costs of compliance and surveillance, but it is better for all industry players in the long term as standards are lifted across the board.”

Managing Director and Group Head of Consumer Banking and Wealth Management at DBS Bank in Singapore, Ms Tan Su Shan commented that,

“To alleviate the increased costs of compliance, we have to put in more monitoring systems that ensure continued real time surveillance affording us bird’s-eye visibility.”

The increasing complexities of financial markets are matched by the exponential increase in technological developments that have been instrumental the rise of finance. Streamlining operations and ensuring compliance in banks is an area in which technology platforms play an instrumental role.

According to Stephan Repkow, CEO of UBP,

Andrew Hendry, Managing Director “Rules surrounding tax reporting and AML have been tightened significantly of M&G Investments, Asia also and this may cause some short term pain commented that,

“We put a lot of store in working with regulators around the world.”

Gary Tiernan, Global Head of Investment Advisory and Client Segment Management, Standard Chartered Private Bank

“Some players have decided to exit the Asian market because of the increased compliance burdens. The regulators are very concerned about the mis-selling of products. Advances in technology however, can make certain investments only available to particular investor profiles. These are becoming an increasingly important tool for banks. It is imperative that banks are able to figure out a compliance model regarding the suitability of products for clients - technology is the only way that this can be done.”

Gary Tiernan, Global Head of Investment Advisory and Client Segment Management in Standard Chartered Private Bank takes a peopleoriented viewpoint on compliance, “From a Standard Chartered perspective, we look at compliance as a continuum that starts at the front line, ie. the person talking to the client, and then leads through a series of control functions. Regardless of how many compliance people we bring

in, it always starts there, on the front line. As a bank, we’re in 70 countries, so our awareness of and adherence to standards is well- rounded. We put a lot of store in working with regulators around the world and invest significant amounts in controls, processes, procedures and indeed, compliance and risk activities.”

ComplianceAsia is a consulting firm in Hong Kong that specialises in regulatory compliance. Due to the fact that approximately half of ComplianceAsia’s clients are in the wealth management and asset management sectors, Philippa Allen, CEO makes sure to keep abreast of the on-going changes in the regulatory models for the industry in Asia. She sees the regulatory regimes as posing difficulties to clients looking to sell more financial products to clients.

“There are perpetual product problems in Asia. Regulation is such that sometimes there is a frustration with the lack of opportunities to structure

“There are now also increased compliance obligations from the government of Singapore.”

Leonardo Drago, AL Wealth Partners

new financial products for clients.

The increased focus on the regulatory regimes in Asia following 2008 represents a sizeable psychological shift from what had always been a “buyerbeware” market, to an increasingly compliance-based model.

Leonardo Drago, a partner at independent asset manager, AL Wealth Partners has seen firsthand the impact of these additional compliance obligations on independent operators in the region,

“There are now increased compliance obligations from not only Government of Singapore but many other countries “Sometimes increased regulation as well. In addition to the onerous can be onerous for new independent process to take on US clients, such is asset management ventures that don’t now extended to European clients and have fee-based revenue streams in the soon will be toward those who come region. Outsourcing compliance issues from OCED countries as well and to us enables them to save on the cost will develop into a full blown global of employing a full-time compliance phenomenon. As a result, a number officer. We are also in constant contact of independent asset managers may be with regulators both in Asia and further afield (such as the SEC in the US), so we merged or closing down and similar to those happening in the private can see the developing trends and keep banking industry. The cost of running our clients in the loop.” such business has and will continue to increase due to this intensive compliance One step removed from the private cost.” banking sector, independent asset managers (IAMs) represent a new Central to the offshore system are breed of wealth manager in Asia. As independents, they face significant professional trustees. The Anglo-Saxon barriers to entry, one of which of course, trust provides myriad benefits for those seeking to take advantage of the is compliance.

“Singapore is keen to stay ahead of the regulatory curve and close any regulatory loopholes there may from business coming out of Europe.”

Dr. Angelo Venardos, Founder & CEO, Heritage Trust Group

regulatory arbitrage between offshore jurisdictions.

Dr. Angelo Venardos, Founder and CEO of Heritage Trust Group, Singapore with offices in Hong Kong and the BVI, described the compliance situation thus,

European countries trying to claw back tax losses that have come from the mismanagement of their economies since 2008. It is not always easily done.

“The OECD’s push for more regulatory compliance, the global KYC (Know Your Customer), DD (due diligence) process and FATCA have all combined to change “In Singapore, there are two regulatory the face of wealth management and initiatives; there is FATCA from ensure that secrecy is a thing of the past. the United States and there is also Politicians have blurred the lines between Singapore’s own legislation which tax evasion, which is wholly illegal and criminalises money laundering. endorsed by nobody, and tax avoidance, Singapore is keen to stay ahead of the regulatory curve and close any regulatory which is legal. We have therefore moved from a situation where the message was loopholes there may from business about tax avoidance to a message that coming out of Europe. Singapore does not want to be caught up in European tax concerns tax planning.” and regulatory issues when there is more As the winds of change sweep through than enough business in Asia. the offshore system, tax planning is graually becoming less opaque. The “At the end of the day, all industries regulatory drive advanced by onshore go through a process of tightening jurisdictions is inconsistent and willfully up at some stage and this is the stage that wealth management and financial ignores the likes of Delaware and the services in general is at in Asia right City of London Corporation. It is a developing and crucial area for banks and now. It largely stems from regulations governments alike. arising from the US, UK and various

Risk Management in Asian Private Banking

Risk Management is perhaps the single most important aspect of the financial services industry and the wealth management sector in particular. The shortcomings of major institutions in this crucial discipline have been revealed time and again over the course of the last six years.

Asia has experienced far less turmoil than Europe and the United States over this time period as a direct result of the Asian financial crisis of 1997. Spectacular losses at that time led to a more pragmatic and sensible approach being adopted by many Asian institutions. A more robust risk management and corporate governance culture in the region eschewed many of the exotic derivative products that were instrumental in the fiscal catastrophes that befell Western markets in 2008.

Real economic growth arising from outside of the financial sector in the years leading up to the downturn

ameliorated the need for the riskier financial innovations and hence protected the regional industry considerably.

Risk Appetite v Risk Tolerance We asked Gary Tiernan, Global Head of Investment Advisory and Client Segment Management in Standard Chartered Private Bank how he ascertains the real risk appetite of clients as it relates to their actual risk tolerance. “It is absolutely essential to dig deep when talking to a client. Peoples’ risk appetite is always very high when things are going well, but you will soon find that their risk tolerance is at a very different level when things start to go awry. “It is very necessary to have meaningful conversations with clients

regarding their investments, so we have created a set of platform tools that helped us to show the client their portfolio and how it may change given certain circumstances. It is part of the ongoing process of educating the client and it is called “Portfolio Insight”. It shows the clients a different picture. These type of measures that enable the clients to see how their risk tolerance may change, sorts the good private banks from the bad ones.”

and some statistical projections and simulations with a number of possible outcomes. I am aware that there are now technology platforms that assist in the risk management space but I’m a little sceptical and worried that this type of thing gets in the way of the real conversation. You have to give the relationship manager (RM) the responsibility himself. It should not just come down to a box ticking exercise where the RM can just rely on the technology platform.

“Aligning expectations and attitude to risk is very important. Reading the client in order to determine what it is that he or she is really saying is crucial. The kind of discussions that you need to have are about ongoing risk and how what you’re Eric Pedersen, CEO of Nordea Private doing is going to affect various other Bank, Asia outlined a more traditional considerations. It is more about developing an understanding and a position, relationship over the course of time rather than just earning commissions “In terms of our risk management from trades. You have to talk about it framework, we use VaR analysis Technology platforms such as this and their role in the risk management process seem to be well-received in many quarters. There is another school of thought however that errs on the more traditional side.

or it goes wrong over the long term.

It sounds very simple but it’s actually very hard to do in real life.

“When you align expectations, you get buy-in from clients. Risk appetite is not static. It is much better to have a discussion over an individual investment and make the client understand the risks inherent in it before committing to it. Once you have that discussion, he won’t blame you if it goes wrong because it was a collaborative effort in which he was made well aware of the attendant risks, as well as the potential rewards.

Decisions need to be taken with eyes open.”

Operating on an independent basis, risk management is equally important.

Claudia Neuenschwander, CEO of independent asset manager, Finaport described the risk management process undertaken by the firm,

“In terms of risk management in Asia, risk is typically managed by asset allocation. Different levels of risk are allocated to assets across different asset classes. They are then adjusted minimally on micro level.

“We are careful to quantify clients’ risk appetite and how it relates to the their risk tolerance. Clients complete a complex questionnaire that produces a number. This ultimately determines their risk appetite, as well as revealing how much loss they can actually tolerate. This is in addition to the regulators’ questionnaires.”

“There are a number of things you can look at. There is considerable pressure on cost-income ratios. Signs of this have been felt by a number of institutions and we have seen some retrenchment in some cases. Having said that, no institution thinks that they’re not going to make the profits they expected. Over the long run, the stronger and deeper established players will win out.

“Therefore the relationship managers must have meaningful discussions with clients regarding their investment goals and their experience. Not only do we use a detailed questionnaire that can be regularly updated, but Risks in Asian we have also developed a dedicated Private Banking risk tool called Portfolio Insight. This provides the client with a detailed risk Gary Tiernan, Global Head of based understanding of their portfolio Investment Advisory and Client including the impact of concentration Segment Management in Standard as well as different scenarios. These Chartered Private Bank spoke about measures enable the clients to evaluate what he considered to be the main risks their risk with greater understanding for private banks in Asia. leading to better decisions.”

A number of private banks have ceased operations in Asia, ostensibly due to increased compliance costs and low margins. As a result, some commentators have labelled compliance costs themselves as a risk. Stephan Repkow, CEO of UBP Private Banking drew a distinction between advent of increased compliance costs and real risk when he said, “I do not see compliance pressures as a risk for our industry. I see it more as way to secure a fit and proper way of doing business. Ultimately it is good for clients when we adopt proper rules and procedures when managing their wealth.”

HR issues have also presented challenges for a number of banks in the region.

Standard Chartered’s Tiernan echoed the view of many industry players with regard to the personnel issues faced by private banks in Asia, “Getting quality people is also tough.

Private banking and wealth management in Asia has expanded over the last decade.

The desire of companies to get people is outpacing the training, with the result that people are being chased by multiple institutions. However, we are seeing lots of improvement. We work hard to develop our staff with training. It is a good thing that Singapore’s competency requirements standards act to ensure that people are competent.”

Repkow of UBP opined that, “You often hear and read that there are difficulties getting quality people, but the top talents are in short supply in any industry. Top people are in limited quantity by definition. If you want best, the talent pool will not be that extensive. I wouldn’t say it’s worse than the investment banking space, where I initially came from. The same issues arise regarding relationship managers as they do regarding investment advisors.

A shortage of talent is characteristic of any competitive industry. When there is a crowded space with a lot of institutions, there a always a lot of snipers and few targets. It’s not unique to wealth management necessarily.”

OFFSHORE FIDUCIARY SPECIALISTS IN SINGAPORE Collas Crill focuses on the growing demand for Channel Islands legal advice in private wealth, investments funds and corporate work in South East Asia, working with lawyers, banks, accountants, trust companies and fund administrators.

The head of our Singapore team, Marcus Hinkley, is a highly experienced trust lawyer with unrivalled offshore expertise from working in Guernsey, New Zealand, the BVI, and the Cayman Islands. Marcus leads a team focused on solutions to cross-jurisdictional offshore private wealth planning. Clients say we are:

“Personable and pragmatic - they find solutions to problems” “Technically strong with an emphasis on being easy to do business with” Speak to Marcus Hinkley about how Collas Crill can help your clients plan for their future.

Marcus Hinkley, Group Partner T: +65 6408 3385 E: marcus.hinkley@collascrill.com

/ services / banking & finance

/ ip & e-business

/ corporate & commercial

/ risk & regulatory

/ investment funds

/ trusts & foundations

Best Practice // Offshore Law Guernsey // Jersey // London // Singapore www.collascrill.com

Independent Asset Management in Asia

The independent asset management (IAM) sector has grown in Asia in recent years. A successful sub-sector in its own right in Switzerland, the model has been introduced to the Asian market and is seen as further evidence of the maturation of the wealth management industry in the region.

It usually involves groups of senior private bankers leaving large financial institutions to form small, independent firms. Generally, they take their clients with them. Some banks are satisfied with the situation due to the fact that they remain custodian of the assets. Advantages accrue to the end-client as a result of increased independence whereby the independent asset manager is not only able to provide choice of products from across a range of banks, but can now sit on the same side of the table as the client and advise without any pressure to sell particular products.

Whilst a number of banks have set up IAM desks to facilitate the needs of this nascent but burgeoning sub-sector, there are a number of detractors who see the obstacles faced by IAMs as surmountable only by a minority of these new firms.

The thorny issue of fees in Asia continues to present challenges, whilst compliance costs remain a continuing encumbrance.

According to Yves Roesti, Managing Director of Solution Providers, “The IAMs are the new kids on the block. They are looking after clients on a fee basis involving holistic caretaking, like a family office.

The proliferation of that model has begun. Roughly 3% of the assets under management (AUM) in Asia is managed through IAMs. These firms are clearly distinct from Asset Managers like Blackrock or Aberdeen. IAMs enter into a fiduciary relationship with the client. They

“The Independent Asset Management model can work very well as it is mutually beneficial for all parties.”

Philippa Allen, CEO, ComplianceAsia

tend to be more active and broad with regard to transactions. Many banks now have IAM desks and have begun to view IAMs as an additional channel rather than competition.”

Philippa Allen, CEO of Hong Kong based consultancy firm, ComplianceAsia describes the IAM industry, “The IAM sector is growing in Asia.

It’s still relatively small but it is increasing in size as time goes on.

A lot of the private banks’ senior relationship managers have seen the kind of remuneration that their hedge fund manager colleagues have been the beneficiaries of and have decided to branch out on their own to create new Independent Asset Management ventures. This model works very well as it is mutually beneficial for all parties; the clients stay with the relationship managers and the transactions and clearing are all still executed by the relationship manager’s

former employer fulfilling the role of the custodian bank.”

In 2010, former Deputy CEO of the Wealth Management division of BNP Paribas, Philippe Legrand teamed up with a number of colleagues and branched out independently to create a Hong Kong-based joint venture with independent asset manager, London & Capital. The result was London & Capital Asia, one of the first independent asset management firms in Hong Kong. The firm is styled as a multi family office (MFO) that serves the needs of all client families on an equal basis.

“We are a Multi Family Office (MFO) in Hong Kong”, explains Philippe Legrand, CEO, “We cater for all the needs of wealthy families.

Generally, this has two aspects; Wealth Management, taking care of the family’s nest egg and Corporate Advisory, helping to grow the family business that created the nest egg.

“According to 2013 CS Global Wealth Report there is USD$51 trillion worth of assets in Asia, growing at 9% per annum. By 2018 that will be 23% of the world’s wealth.”

Philippe Legrand, CEO, London & Capital Asia

“We also facilitate the requirements of families in other areas. As the first point of contact for the client, we coordinate the various aspects that are involved and enlist professionals accordingly. We are not lawyers or accountants, we are investment managers, but we serve as a one-stop solution for the client by working with other partners to identify and secure their needs. A lot of the wealth is Asia is still first generation wealth, so we are at an earlier stage of the wealth management cycle than in Europe.

The primary concerns of most family businesses are firstly, the protection of the assets that have been accrued, and secondly, growing the family business. Structures such as trusts and foundations, as well as services such as insurance, succession planning and investor visas to Western countries are often some of the initial issues that we coordinate for clients.

“As one of the first independent MFOs, it is important to emphasise

that we did not start off by serving the interests of one family in particular.

We have no specific family holding.

We are therefore able to serve each family equally.

“It was initially important to emphasise to clients that we were not in competition with the banks, but rather, we sit on the side of the client whilst using the banks’ services.

Being independent of course, enables us to choose the best financial products from a variety of institutions on behalf of clients. As one of the first independents in Hong Kong, there is an element of trailblazing in what we have done and we have already seen changes to the industry in a short space of time. When we first started out four years ago, only a handful of banks had a dedicated IAM desk. Now however, nearly every private bank has dedicated services to facilitate firms like ours.

“We are an independent boutique firm

“Setting up as an Independent Asset Manager is not cheap, you need capital to pay for the increasing costs for compliance, IT and infrastructure.”

Claudia Neuenschwander, CEO, Finaport

with a number of skilled professionals with various levels of expertise. We have good people here. We don’t limit people to silos. It is very much a team effort.

“We see tremendous potential for the future of the market. According to 2013 CS Global Wealth Report there is $51 trillion worth of assets in Asia, growing at 9% per annum. By 2018 that will be 23% of the world’s wealth. 10% will be in China alone. Most of this is first generation wealth.

“We aim to maintain our status as a boutique firm. We are not seeking to grow exponentially. As pioneers in the space, we do however like to illustrate to other wealth managers that the independent route is something that they too can pursue. It enables one to take a more client-centric approach which really serves the needs of clients, rather than the demands of a bank. Here at London & Capital Asia, we consider ourselves “best in breed”, with a

completely open architecture.”

Independent asset manager, Finaport opened its Singapore office in 2009, operating under a boutique licence. The business grew quickly and Finaport reached the maximum quota of client and assets under management (AUM) allowable under the boutique license and hence were granted a CMS licence one year ago. The Hong Kong office was established in 2012.

Claudia Neuenschwander, CEO of Finaport explains the challenges to new market entrants in the IAM sector, “Setting up as an IAM is not cheap, you need capital to pay for the increasing costs for compliance, IT and infrastructure. However, because we are smaller and more flexible, costs are easier to control. Being small can therefore be an advantage.”

“The difficulty in Hong Kong is not in getting clients. It is to get the talent

to look after these clients. In terms of relationship managers in Asia, there is talent but the problem is that everybody wants that talent. The IAM model is only now becoming known in this part of world.

“For us, when recruiting a relationship manager, the crucial aspect is that they must be experienced, with at least ten years in the industry. They have to have an existing book of clients, have the ability to understand their clients needs and the ability to meet them, They cannot be simply successful product pushers. Our priority is to represent the client, not the bank. This must be reflected in the RM’s approach. We also require an entrepreneurial spirit and independent thinking. It is quite a narrow description, so it can be difficult to find the right people.

“These RMs are leaving a structured environment and they have to create added value for the client in order to get paid. They are assuming total

accountability. For some people, this can be a better lifestyle because in many ways, there is less pressure than working in the bank. The rewards can be great, but they need to be very good at what they do because the safety-net of a bank is not there.

“Clients don’t have a problem paying a premium but they have to see added value. For the benefit of our clients, we want to be global in order to give them access to opportunities and know-how internationally. We want to grow for them and build an environment that facilitates their needs. So before we can operate in a new location we have to get all the necessary licenses which is a big commitment. The rules and regulations are the same for us as they are for the banks, but we don’t have people who are under pressure to sell and to produce, The fact that we sit on the client side, takes away the pressure for turnover. The ultimate goal is to get consistent performances for our clients, why else would they pay for our services? We don’t set targets for

our RMs. The ideal number of clients for each RM is about 10-15. Every RM hiring is a huge effort and we make sure to take our time in picking our people.”

of Independent Asset Managers in Singapore, which now has approximately 25 members.

“The sector is currently growing but is still at an early stage. There are Leonardo Drago is a co-founder of the also issues that IAMs are facing with regards to fees. European and US Singapore-based independent asset clients are used to being charged a flat manager (IAM), AL Wealth Partners.

Leonardo set out with partner Anthonia fee whereas Asian clients are more used to transaction fees. Increased Hui, after she left Credit Suisse in compliance costs and the delicate 2007. AL Wealth Partners is one of issues surrounding fees are combining Singapore’s more established IAMs. to add downward pressure on margins in the industry.

“This model is prevalent in Switzerland, but it is quite new in Asia.

We were one of first ones here in Asia, “Some commentators have questioned the viability of the IAM model in but since we began, a lot of Swiss institutions have set up IAMs in Hong Asia. For the average player I agree that the IAM model is very difficult, Kong and Singapore. Essentially we manage money independently, which especially in recent years primarily due to the higher costs of compliance. The means that we sit on the same side as private banking model itself in Asia is the client and avoid the conflicts of currently being squeezed. Some private interest prevalent in the industry.” banks are leaving the region and we have also seen some consolidation.

An interesting development is that All asset managers that depend solely Anthonia Hui is one of the founders on transaction fees will experience far and chairperson of the Association

more volatile earnings, and any bouts of sustained investor risk aversion will make the sustainability of the business more difficult to achieve. We don’t manage clients on that basis, preferring to get paid for the advice given.

“Generally, good independent asset managers (IAMs) have clearly articulated reasons for providing their services in the non-standard way. They must be able to articulate the difference that they bring to the table, compared to a standard 60/40 equity/bond portfolio split. The value-add from engaging IAMs can be purely investment performance based, or it can include other services advising on direct private equity deals and even assisting the client in teaching the next generation the value of money.

“In Asia its common for high net worth individuals (HNWIs) to have as many as ten asset managers. We are often asked to help them with inputs on how much risk the managers are

taking, and whether on aggregate there are additional risks that each manager independently would not be aware of. We are somewhat similar to a family office insofar as we are happy to help the client to consolidate assets and oversee the actions of other asset managers they may use. This does not just entail aggregating the values and coming to a figure. The main thrust of our work is investment strategies, not just individual investment performance.

We maintain a low number of clients, which enables us to allot sufficient time and resources to each client.”

Eli Bitan is CEO of BHI Investment Advisors, a subsidiary of Bank Hapoalim, which effectively operates as an IAM in Asia, despite the fact that its parent is a large financial institution.

Bitan opined, “I think IAM is the business to be in in Asia. Clients know that in dealing with us, they are going to get the best

possible deal in the market. I can even put our bank in competition with other offerings on the market. There is a lot of scope for the expansion of the IAM model. More clients are moving our way because of it. Our main problem is that we are relatively new for Hong Kong and China. We need to work harder in order to explain the business model because people get a little confused about the additional layer thinking that it means more cost, but in actual fact, we can get wholesale deals for our clients, so it’s quite the opposite.”

Gary Tiernan, Global Head of Investment Advisory and Client Segment Management in Standard Chartered Private shared his view of the IAM trend, “It is clear that we are seeing growth in the IAM space in Asia. I think the vast majority will have a tough time.

Experienced bankers realise that on the one hand, you can be independent

and make decisions for yourself, but on the other hand, the huge support of a major bank is not something to take for granted. The office runs smoothly without you, you have access to investment professionals and specialists, as well as trust and fiduciary specialists. It’s not so easy in a small independent start-up. “ While there has been that growth in the area, it is also an area that,I think that regulators will look at a lot more now. As a regulator, you want to have proper oversight, so there could be some special higher standards for IAMs in the pipeline.

“Many of the independent asset managers want to work with various banks who then hold the client account as custodian. The banks themselves do due diligence on IAMs and end-clients. As a result, clients sometimes ask themselves “Am I working with the bank or the independent asset manager?”

“The development of the IAM sector is a sign that the wealth management industry in Asia is getting more sophisticated, as are our clients.”

Stephan Repkow, CEO, UBP

“So, there are two schools of thought with regard to IAMs - one is that their time has come and they will prosper, whereas the other is that most IAMs in Asia will fail. I think time will tell.

There are many springing up. What is clear is that they need to have the proper controls in place and that is going to make it difficult for them to deliver in a profitable way.

“They can leverage a lot on bank platforms through IAM desks that are have been set up in a number of the major banks. Is it a sensible business for a bank to be supporting in that way? Well, the requirements for the bank with regard to these clients are just as onerous as the pure bank clients, so the desirability of the model has to be looked at more as time goes on.”

Stephan Repkow, CEO of UBP adds that, “A lot of people are talking about IAMs. There is a fashion about it. It

follows a model similar to the Multi Family Office (MFO) complex. It’s now a reality on the ground because more and more small institutions are setting up shops. The question is, will it be equivalent to what it is in Switzerland, where it represents a quarter of wealth managed there? I don’t think so. It will probably be some time before its comparable. It is a sign though that the wealth management industry and our clients are getting more sophisticated.

“The wealth management industry is still quite young in Asia, about 25 years old. It takes time because the management of wealth gets more structured with the transition of wealth between generations and becomes more professionally organised over time.

“I am not sure that IAM is necessarily an economically attractive model because it ends up adding layer of fees.

There is high sensitivity towards fees

“Our business model is a purely B2B one. Pershing provides financial solutions and a technology platform to act as custodian for the investor’s assets.”

Mark Nelligan, CEO & Managing Director, Pershing Singapore

from clients in Asia. Private banks like us have to be extremely transparent with our fees.

“What an IAM is offering is essentially independence regarding investment services and how the solution is served.

When you are pure-play private bank which is not listed, then you can also offer a real, unbiased and unconstrained wealth management service that is in line with what an IAM can do. So, as a HNWI, do you need an IAM if you can have same service from us? It’s not a one-size-fits-all proposition. There is still room for IAMs to grow but I don’t think it can reach the same level as Switzerland.”

The New Model Custodian

“While the IAM desks of private banks may provide the independent firms a viable solution, some advisors may prefer a more independent partner who does not compete with them for their clients.

Pershing’s solution is very much akin to that offered by the IAM desk except that our business is aimed solely at financial intermediaries – we do not have an advisory/wealth management business servicing end investors. Our business model is a purely B2B one. We support any financial intermediary who, in turn, services the investor. Our client, the advisor, retains ownership of the investor and is responsible for KYC & suitability, i.e. the advisory role. Pershing provides financial solutions and a technology platform and acts as custodian for the investor’s assets.

There is an alternative to platforms offered “We see a global trend of advisors by the IAM desks of private banks. moving from being professional sellers of products to professional buyers, from Mark Nelligan, CEO & Managing being sellers of bank-tied products to Director of Pershing Singapore, a BNY client advocates with more of a fiduciary Mellon company, explains, role. Such advisors quickly realise they

need access to whole of market and best of breed solutions for their clients that are transparent and competitively priced, as well as help in running their business. We believe the growth of the IAM model in Asia is in line with these global trends. Pershing’s goal is to support such advisors and help them build their own brand; we make significant investment in technology, financial solutions, the client service experience and practice management support.

“What we have seen in other markets is that the use of IAMs and Family Offices – the Professional Buyers – will result in greater transparency and a bit more of an auction market for services and solutions. Both of those factors generally drive down the costs for the consumer. The IAM won’t be affected because they are charging a fee for being the client advocate. The product providers, custodians and platforms, especially those that have wrapped all their costs into a bundled offering, will suffer margin compression. It will also force them to create solutions more relevant and helpful to their clients.”

Discretionary Portfolio Management In Asia

Whilst still small in comparison to Europe, the percentage of assets under management (AUM) that is managed on a discretionary mandate has grown steadily in Asia recently.

Discretionary Portfolio Management (DPM) is a relatively new concept to many Asian high net worth individuals (HNWIs), largely due to the fact that the wealth that has been created in Asia in recent times is mainly first generation wealth that many entrepreneurs prefer to manage on a more hands-on basis.

Nevertheless, the process of educating clients is ongoing and there has been a considerable degree of success. There are manifold benefits that accrue to private banks when managing assets on a DPM basis and hence it is a key area that is being looked at across the board. There are a number of idiosyncrasies regarding this aspect of the wealth management industry that we discuss herein with leading executives in the area.

“Many private banks in the region are actually disposing of their DPM units because they want to stick to what they are good at - relationship management.”

Andrew Hendry, Managing Director, M&G Investments, Asia

What remains unclear is the overall percentage of AUM that are operated on a DPM basis in the region. The estimates vary considerably.

Andrew Hendry, Managing Director, of external asset manager, M&G Investments Asia explained that, “Many private banks in the region are actually disposing of their Discretionary Portfolio Mandate units because they want to stick to what they are good at relationship management. Many of these may be well-served by outsourcing their DPM to us. In Switzerland, the industry is predominantly discretionary - (above 50% of the assets under management (AUM) is on a DPM basis).

“If private banks in Asia want to do the same and set up their own funds, they can generate good returns. I know that some of them have good in-house teams and even an impressive alternative fund of funds team.

“In setting up such teams however,

the upfront costs are very considerable indeed and sometimes, if you choose to buy established funds, your ability to generate positive returns is increased. If your in-house team doesn’t cover every asset class, it’s beneficial to outsource the rest to a best-in-class provider. The end result is usually better. Often it’s a strategic decision for these firms the most talented fund managers are usually based in Europe and the US, not necessarily Asia.

“M&G is an investment management company that provides investment services to a number of global private banks and family offices in Asia. Those private banks in Singapore and Hong Kong have direct relationships with the high net worth (HNW) clients, acting as their financial advisor and wealth planner. They manage only a small percentage of their clients’ investments in-house and some do not actually handle that at all - that is where we come in. M&G Investments has over eight decades of experience in the management of money.

“A private bank looks after clients’ financial needs on a holistic basis. We don’t have any knowledge regarding tax planning or succession, so it is important for end-clients to work with a private bank in that respect. What we do is manage the investments - it is our sole focus. By comparison, a private bank’s focus on the investing side is relatively small. We live and breathe investments. We have a proven track record and have consistently delivered good returns for institutional clients for decades. This is a difficult thing to do well if it is not your sole focus.”

banks offer DPM as part of their standard proposition to the client, but penetration rates in terms of assets under management (AUM) are typically at a low single digit percentage. Local HNWIs are more hands-on and hence often prefer to use relationship managers (RMs) as advisors and executioners. Handing off decisions to bank under a discretionary mandate can be difficult for entrepreneurs who have accumulated their wealth singlehandedly.

“As a result, only a few players successfully launched this service in Asia. Setup correctly, DPM Yves Roesti, Managing Director can become a significant annuity of Singapore based management consultant, Solution Providers, outlined contributor to the revenue model of a the progression of the DPM area when private bank. As a point of contrast, DPM mandates in Switzerland can he told us that, make up to 30% of a wealth managers’ AUM.” “In Asia, discretionary portfolio management (DPM) is a service Eric Pedersen, CEO of Nordea Private offering to the client that is still under development – traditional private Bank observes significant differences

between the nordic appetite for DPM and the uptake in Asia, “The Nordic tradition of wealth management is far less transaction based. There is also a lot more discretionary portfolio management (DPM) than is presently seen in Asia.”

Eli Bitan of BHI Investment Advisors also observes increased appetite for DPM in the region and goes on to succinctly summarise the industry view on the topic, “DPM is starting to grow a bit here now. In Europe, discretionary mandates are up to 20% of overall AUM. In Asia, we’re lagging behind.

I would say it’s less than 5%. This is where the business growth can come from. I prefer to do DPM.”

Rise of the Chinese High Net Worth Individual

Jennifer Zeng, Partner at Bain & Company is the author of the China Wealth Report. We spoke to Ms Zeng about the findings and methodologies of the report.

“The report was a joint effort with China Merchants Bank, an indigenous private bank in China. 2013 was the third edition. Essentially, it examines the behaviours of high net worth individuals (HNWIs) in the different geographic regions of China,” asserts Ms Zeng, “We conducted over one hundred focused, in-depth interviews with HNWIs and surveyed 3300 HNWIs. Our definition of HNWI was over 10 million RMB in investable assets, including real estate but excluding their first house.

“There are over 700,000 HNWIs, 50% of whom are concentrated in Tier one cities and costal areas such as Beijing, Shanghai, Guangdong,

Zhejiang and Jiangsu. Approximately 20% of HNWIs’ assets are managed offshore. This has grown from less than 10% in 2009, so it exhibits a significant increase. 50% of that is managed in Hong Kong.

“We have seen that the respondents become more risk averse over time, with wealth preservation overtaking wealth creation as the primary concern. A lot of HNWIs have now shifted focus, so that their number one priority is now wealth preservation.

Offshore behaviour follows on from that. We are seeing an increasing trend towards that throughout all of the regions in China. Approximately 60% of the HNWIs in China are business owners. Some are professional investors.

“In terms of the methods that they are using to preserve their wealth, fixed income products with mid-level riskreturn profiles are the primary vehicle.

“A lot of HNWIs have now shifted focus, so that their number one priority is now wealth preservation. Offshore behaviour follows on from that.”

Jennifer Zeng, Partner, Bain & Company

“Inheritance is the second major concern of Chinese HNWIs. As such, family trusts involving offshore asset allocations are increasingly sought after.

purchasing criteria for HNWIs re private banks.

“Brand and trust go hand-in-hand in China and a lot of Chinese banks have invested heavily in this area, “HNWIs are now increasingly seeking achieving good levels of brand awareness. wealth inheritance advice and using private banks as the primary channels “The service levels are also quite for their wealth management, as opposed to friends and family, which high. Relationship managers are typically much younger in China, was more commonplace previously. usually being in their late 20s or early 30s.

“In terms of the industry, the landscape is very competitive overall, “Our report provides great insights with the offshore market providing with regard to what Chinese HNWIs a lot of competition for onshore are looking for, but it is clear that Chinese banks, who are also now foreign private banks need to setting up their own offshore arms. differentiate themselves and market themselves properly in order to take “The main thrust of the report is that advantage of the HNWIs’ increased the Chinese HNWI has a number of propensity to invest overseas.” diverse needs and is becoming more sophisticated over time. In order to William Ahern of Family Capital compete in China, service providers Conservation observed that, need to excel in brand, services and expertise, as these are the top three

“While conservation is becoming increasingly important, at the moment the priority amongst high net worth individuals (HNWIs) in China is still to grow the nest egg.”

visas and second homes become the priorities. China doesn’t allow you to have two passports, so the focus therefore becomes getting residency abroad.”

Michael Olesnicky, Partner at law firm, Baker & McKenzie has his own observations regarding HNWIs arising from the Peoples’ Republic of China,

Eli Bitan, CEO of BHI Investment Advisors see the Peoples’ Republic as a huge source of potential clients.

“The wealthy class in China is a lot younger and therefore less concerned with long-term succession planning.

These are 40 year olds looking for ski homes and young entrepreneurs still ploughing money into their business, without much excess cash left over.

Even if they did have excess cash, the opportunities for investing it in China are limited to real estate, stocks and shares. They therefore need to send this cash abroad and need to structure that accordingly.

“Chinese entrepreneurs are increasingly sending family members abroad to study. Schools, investor

“Business from Mainland China is a target demographic for us. The whole legal side of how to do business in China presents us with challenges though. In terms of net new money, China really represents a massive opportunity for growth.”

Jay Jhaveri is Business Development Manager of Wealth-X, a company that compiles public information on UHNWIs (Ultra High Net Worth Individuals) and enables the wealth management industry to subscribe to their database.

“Wealth-X is more than 3 years old, so it is no longer a start-up. We operate

“Globally, there are 200,000 people who have an aggregate wealth of USD $28 trillion. This is more than the GDP of the US and China combined.”

Jay Jhaveri, Head of Business Development, Asia, Wealth-X

in the Ultra High Net Worth (UHNW) space. Let’s define what UHNW means.

There is a lot of literature at a macrolevel available regarding HNWI. They are popularly defined as having a million plus, and that can be in USD, GBP or EUR, depending on where you are, so generally that’s plus or minus 30%.

“The definitions differ because sometimes they consider net assets, whereas other times it is purely investable assets. The fact of the matter is that, for people looking to fundraise, a million dollars no longer cuts it anymore. One in five people in Singapore are millionaires. In an economic downturn, however, those people stop spending. Our clients need to therefore target UHNWIs, which we define as having USD $30 million or above in net assets.

combined. Our studies suggest that the financial behaviour of this demographic does not change in a downturn. They continue to spend as normal.”

This trend is important for three industries: 1. Financial Services: Private banks, hedge funds and trusts 2. Luxury goods industry: Jets, boats, yachts, art, and high-end property 3. Charities: humanitarian organisations, sustainable development agencies, hospitals, NGOs and philanthropic causes

“These are the three broad industries that need to engage with UHNWIs. We have the data, information and intelligence that enable our clients in these sectors to engage with the UHNW demographic. At a macro-level, we produce reports like “The Wealth-X “This group globally consists of nearly and UBS Billionaire Census” that are 200,000 people who have an aggregate useful for forecasting and strategic decision making as they present data wealth of USD $28 trillion. This is more than the GDP of the US and China and statistics from a bird’s eye view. At

a collective level, we can determine where this economic activity takes place.

“On an individual level, users can access all of the public domain information available on UHNWIs. We pay to get access to company registrars and collate all of the information that is available publically in a legal and ethical way. 50% of our clients are in financial services whereas the other half is split evenly between the luxury goods market on one hand and charities, universities, NGOs and hospitals on the other. Wealth X is growing rapidly in all three sectors.

“Private banks greatly appreciate our data at both a macro and micro level because, of the approximately 200,000 UHNWIs in the world, there are well over 110,000 people in our database.

We have more than 180 researchers around the world who ferret out the

information and put it together.

“Our database is continuously being updated because people are constantly wheeling, dealing, divorcing and dying. We are based in 13 cities across five continents and are proud to have Singapore as our headquarters. Our clients are happy with our service because we have a 96% renewal rate, and 60% of them even enhance their level of engagement. It is, therefore, clear that we are providing value.”

Technology in Asian Private Banking

The ever increasing influence that technology has on our daily lives continues to change and improve business methodology. The wealth management industry is no exception and indeed, can be a primary beneficiary of the exponential growth in technological capacity and innovation. As is the case in many industries, there is a risk, that technology may be over-relied upon.

The importance of maintaining a balance between traditional methods and modern convenience is of primary concern for the future. The “why” questions must continue to be explained to industry newcomers and should not be forgotten when outlining processes and procedures.

Founded in 2001, FinIQ is one of the premier technology providers to the Asian wealth management industry.

We spoke to Mahesh Bulchandani, CEO of Asia Pacific Operations, who started his career in software

before going into finance.

Bulchandani was a rising star at JP Morgan when he first came across FinIQ’s technology as a client. His natural interest in technology was again piqued and the bank made an exception, allowing him to form a sales-focused technology team that represented a departure from the norm. Eventually deciding to leave finance and re-enter the technology sphere whilst bringing his banking experience to bear, Mahesh took a minority shareholder stake in FinIQ and has not looked back.

“As I had been a client of FinIQ previously, I knew it was an excellent technology provider. In my experience, most vendors were difficult to work with because any customisation work that takes place after the initial project usually involves extra fees that bring projects over-budget. The FinIQ philosophy is different, we install each system on a fixed-cost basis. Subsequent

“It is critical for us that our staff have a deep understanding of the banking context in which our systems function.”

Mahesh Bulchandani, CEO, Asia Pacific, FinIQ

customization projects are also undertaken on a fixed-cost basis.

The client is not charged a single penny over the agreed price. None of our development is outsourced, our systems are entirely produced by fulltime staff based in India.”

grew, a wide range of FX, Equity, IR and Credit linked products were added.

“As a multi-product offering, we were able to provide a number of critical services to the market. We think about our product offerings in two “It is critical for us that our staff have ways. Firstly, we think in verticals, ie. we have products that can be white a deep understanding of the banking context in which our systems function. labelled for our clients that enable them to support structured financial Our functional experts are trained in products such as equity linked notes banking practices because they need (ELNs), structured notes, cash FX, to know about regulations, central bonds and options. Our systems deal clearing, derivatives and swaps. It with every variety of products that a is a priority for us to have a deep private bank needs. understanding of our clients that permeates the organisation.

“Furthermore we also think about non-functional aspects. For example, “FinIQ originally started as a single where does this system fit in the product system that provided dual workflow? How will the relationship currency investment (DCI) services manager (RM), be able to best utilise on a secure platform. The company the system on a day-to-day basis? How acquired its first client in 2002 and should the system assist the advisor gradually built its client base as its in choosing the most appropriate offering became more widely used in products for a particular client? the market. As the number of clients

“Throughout the pre-trade process, the system incorporates considerations regarding credit and compliance constraints, so that RMs can see the most appropriate products for each client. Trades can then be made through the system accordingly.

The post-trade process is another major consideration and an area in which FinIQ can provide a great deal of value to clients insofar as processing every transaction for its entire lifecycle.

changing. Initially people viewed us just as a value-for-money vendor.

However now they have realized that they get a lot more than just value.

They like our end to end solution.

Some clients even consult with us regarding their internal processes.

We are becoming a genuine enabler for best practice processing. Our clients have realized huge efficiency improvements after rolling out the FinIQ platform. For instance, one of our clients saw a ten-fold increase in sales of a product, making it a major player in a space where it was a marginal player earlier.”

“It is very complex, involving many events, all of which we process. We tailor each installation to the client’s specific needs. Some may only want The Compliance Utility to make advisors more productive, whereas others want to increase back Andrew Hendry, Managing Director office efficiency on the post-trade side of M&G Investments in Asia sees of things.” new technological platforms as a tool to ensure that business is conducted We asked Bulchandani how the within regulatory limits, hence market has taken to FinIQ. mitigating the effects of increasingly burdensome compliance obligations, “I think our image in the market is “Some players have decided to

exit the Asian market because of the increased compliance burdens. The regulators are very concerned about the mis-selling of products. Advances in technology however, can make certain investments only available to particular investor profiles. These are becoming an increasingly important tool for banks. It is imperative that banks are able to figure out a compliance model regarding the suitability of products for clients - technology is the only way that this can be done.”

Caution Against OverReliance According to Gary Tiernan, Global Head of Investment Advisory and Client Segment Management in Standard Chartered Private Bank, “There are many different technological tools in the marketplace now that clients can use online without banks. It is important that these tools

don’t just show simplistic analysis.

What is crucial is that the people who these clients rely on for advice are using these tools properly to guide them to a proper risk profile that is suitable for the client. You still need the right advisor. The tools on their own don’t cut it. It is critical that when the client buys-in to an investment recommendation, there is a common understanding of the investment strategy. It is also equally important to understand and take account of other considerations, which are usually not reflected in most technological tools and that can change the goals and circumstances of clients.”

New Business Models Yves Roesti, Managing Director of Solution Providers, describes an industry trend, “In terms of new business models in private banking, there are several affluent regional banks that are

“Banks need to prove to their clients that they can manage risk and have the tools to do it. Demonstrating this ability to the client is of crucial importance.”

Jean Luc Freymond, CEO, SAGE beginning to take advantage of the proliferation of new online channels to the customer. Many private banks are beefing-up their online offering in attempts to differentiate themselves in the market.”

in a client-friendly format, allowing them to pick and choose asset classes and industry sectors that they are interested in.”

Established External Asset Managers are also providing white-label technology platforms for banks that integrate systems across partner organisations whilst providing banks with an interface that can be used by their clients.

An example of what Roesti describes is the new offering that DBS Bank has brought to the market. Ms Tan Su Shan, Group Head of Consumer Banking & Wealth Management in DBS Bank, Singapore told us about the bank’s new online trading platorm, SAGE, (not to be confused with Sage plc) is a Swiss company that has launched a new software platform “On 24 June 2013, we launched for investment managers named DBS Online Trading for our private bank clients which allows “BlackSwan”. clients to buy and manage their C.E.O. Financial spoke to Jean Luc equity portfolios. We will also be launching a personalised “YourDBS” Freymond, CEO of SAGE, subscription for clients, allowing them “The BlackSwan Financial Platform to customise their DBS Private Bank enables wealth managers, banks, homepage. In Q4 2013, we began providing all clients with an online asset managers and family offices to repository of all research materials by make better investment decisions.

In 1990, Harry Markowitz won the DBS Group Research, DBS Vickers and the DBS Chief Investment Office Nobel Memorial Prize in Economics

for his Modern Portfolio Theory which studied the effects of asset risk, return, correlation and diversification on investment portfolio returns.

“Over time however, it became clear that the theory did not take into account the more complex aspects of the way in which modern financial institutions operate. We worked with two professors who have researched the area for over 10 years each in order to produce a more accurate and effective model that is implemented in our software platform.

appreciate the significance of inflation, unemployment and the price of oil, but when matters become slightly more actuarial, there is often a disconnect. We seek to plug this gap with our software.

Investors are, after all, the ones who ultimately own the risks that are being taken with their investment.

“After 2008, when it became apparent that risk wasn’t being managed adequately on a grand scale by institutions such as Lehman Bros., a lot of clients lost trust in financial “We wanted BlackSwan to be something institutions. This was a big challenge for the banks. Regaining trust is a key that relationship managers could issue. Now and in the years to come, use in conjunction with their clients.

Inside most financial institutions the volatility is high and bond yields are comparative risk metrics are often down. If investors want return, they have no choice but to take on risk. Banks need complex quantitative metrics that are to prove to their clients that they can understood by a select few inside the bank - usually the investment committee manage risk and have the tools to do it.

Demonstrating this ability to the client is and the risk managers. In order for BlackSwan to fit the needs of relationship of crucial importance. managers in dealing with clients, we “These tools enable investment managers had to ensure that the interface delivers to involve the client more closely in discussing the various possible scenarios information in a way that makes sense that may arise. This means that there for investors. The average investor will

is more buy-in from the client as they are more actively involved in the decision making process. BlackSwan enables the client to see the various permutations and combinations that may arise from decisions made. This can be seen on a tablet device. This added interaction means that there is increased transparency and therefore trust is engendered and relationships are strengthened enough to overcome the ups and downs of financial markets. “We are also working with another Professor on a behavioural analysis programme that enables an investment manager to determine the actual risk appetite of a client by asking questions and entering the results into our system. Another innovation that we are introducing in the short term enables a user to simply drag and drop an excel file of client investments and analyse it on the fly.�

FinIQ’s new SaaS Platform for Private Banking “EQ Connect” Shodhan Shah, Director, FinIQ FinIQ, one of Asia’s most established financial technology providers to the private banking industry launched its new Software as a Service (SaaS) platform, “EQ Connect” in Q2 2014. The platform connects buyers and sellers, i.e. private banks and investment banks in real time.

Bringing the parties together to trade structured equity products such as Equity Linked Notes (ELNs) and first generation derivatives on a secure, real-time platform provides a number of benefits to clients.

With EQ Connect, relationship managers in private banks are able to search, select and request prices from multiple parties on the Sell-Side. They can then proceed to place an order and receive real time notification when the order is fulfilled by the Sell-Side.

Overall on the Buy-Side, private banks and wealth managers can expect increased efficiencies in terms of price-discovery, order placement and

order execution, leading to increased throughput. The platform enables blocking of certain products, if they are inappropriate for specific jurisdictions.

Management can also block certain product types for internal compliance reasons, or block certain Issuers due to credit limitations, or lack of sufficient documentation or any other reason. Similarly, Issuers can block certain private banks, or block specific products for certain private banks for any reason including lack of sufficient documentation.

According to FinIQ’s CEO for Asia Pacific, Mahesh Bulchandani, “Current practices in Europe and USA are mostly based on phone calls and a huge mass of emails back and forth between the Advisor/Relationship Manager and the Private Bank’s Product Desk, each mirrored by a larger multiple of phone calls and emails to the Sell-Side. The end result is a delayed price discovery, missed market opportunities, inefficient final

price and sometimes even nonoptimal product parameters for the end client. Our real time, secure, interactive EQ Connect system solves all these challenges, and allows the private bank to find the right structure at an optimal price for their end client, without compromising the timeliness. “The transparency that the system delivers is a major advantage to both buyers and sellers. The reports that EQ Connect provides enables each side to easily quantify the business that they are doing with each counterparty. This enables management to take fully-informed decisions when re-evaluating order management processes and pricing processes in light of this new data.�

“Management teams can get multiple benefits from EQ Connect. They can prevent excessive credit exposures to specific Issuers, they can check which Issuers are giving timely and sharp prices, which Issuers are providing timely and consistent filling of orders, and use this information to control their multi-dimensional business relationship with various Issuers.

Safety & Security SaaS is a new delivery channel for FinIQ, reflecting a high degree of confidence in the precautions that have been taken to ensure the safety and security of the platform.

Mr. Bulchandani outlines the testing process by saying,

“We have had to be a lot more careful when producing this platform, as it is hosted on infrastructure leased by us, as opposed to sitting behind client firewalls in the way that our other products work.

“With EQ Connect, we have gone through an extensive process of penetration tests to ensure that it operates at the highest degree of security confidence.”

“FinIQ has chosen a cloud provider that has performed the threat and vulnerability assessment in accordance with the MAS guidelines.

Furthermore, FinIQ has verified the security of the cloud infrastructure by having an independent third party perform an audit of the infrastructure.

In order to isolate the EQ Connect platform’s computing resources from other tenants of the cloud, FinIQ hosts it on a private cloud. Just like an application hosted internally by a bank is only accessible over the bank’s intranet, the EQ Connect platform will only be accessible from the bank’s network over an encrypted channel and firewall controls.

EQ Connect provides a simple and intuitive web-based interface. The workflow reflects the practical process followed by the buy side banks when they price and trade these products FinIQ provides tailored training to its subscribers, ensuring that they can fully leverage the potential of the system.

Business Process Outsourcing

Dwindling margins are adversely effecting private banks in Asia.

Management consultants are suggesting ways in which cost savings can be made. One such methodology is business process outsourcing (BPO), under which back office functions are performed by an outside company, enabling the bank to not only cut costs, but streamline its internal operations.

“The digital bank or eWealth is the space wherein Solution Providers is dominant in the development of best practice approaches. We show institutions how to engage clients in new ways and eradicate inefficiencies.

We draw a critical distinction between value-add features and non-value-add features. Online client journeys are areas in which we see potential for differentiation for our clients.”

Yves Roesti, Managing Director of Solution Providers, expounds upon the methodology of a consultancy that looks ahead to what the wealth management industry in Asia is en route to becoming,

“The operational models of private banks are another area in which we provide value to institutional clients. Europe is consolidating at the moment. The fact is that 160 private banks cannot operate using the same model anymore. Shrinking margins due to rigid cost structures and an eroding revenue base prohibit you from doing business in the same way. We therefore expect to see more consolidation as time goes on.”

“There is something similar happening in Asia with the foreign onshore banks. Subsidiaries that have

“We position ourselves to help define and implement business strategies in the wealth management and private banking industry, including external asset managers. We handle business and IT change management and guide institutions into a new space following a merger or re-platforming.

“Private banks simply don’t create the volume to justify vast back office operations.”

Yves Roesti, Managing Director, Solution Providers

heavily invested in Asian marketentry have been pushing the growth of AUM. Singapore is becoming an expensive place when you include the addition of a full-fledged back-office operation. Local banks have a leaner infrastructure, resulting in a lower costincome ratio, whereas foreign banks have to buy into market and prospect.”

Roesti goes on to outline an emerging model that utilises the principles of consolidation whilst adding considerable value by way of cost-savings,

cost structures, but smaller private banks simply don’t create the volume to justify vast back office operations.

From our studies, we believe there is a critical level regarding cost structures in the market, and below that you will be forced into a new operating model in order to survive.”

“For example, a wealth manger who manages $8 billion USD has a typical cost margin of 87 basis points and operates with an average revenue margin of 84 basis points – many such small players are caught in a cost trap.

There is a critical threshold and if you’re below that, then you operate in the inefficiency zone and will be forced to change your business model in order to decrease costs.”

“We are looking at a new model that enables a bank to drastically reduce costs. It is a BPO (Business Process Outsourcing) model that promotes carving out and industrialization of non-differentiating processes, such “Emerging third party BPO platforms as payment or corporate action. We think these functions will eventually be are able to offer new cost/revenue models to the wealth management consolidated and outsourced.” industry, such as pay-per-transaction, so that you will only have to pay for “If you are a top tier universal bank, the back office operations when it is then you are able to achieve leaner

actually working for you. Players are building up their offerings in this area and we expect it to be a growing subsector. Economies of scale involving a centre of excellence and taking a centralized, industrialisation approach is set to become a big trend in the industry.� “Advising and conducting market studies on areas like this is what we do because we understand the wealth management industry. BPO has emerged already in Switzerland and will soon be commonplace in Asia.�

Approximately 25 years into the Asian wealth management story, it is still an evolving and maturing industry. Issues of fees, outsourcing, consolidation, strategy and new market entrants continue to present both challenges and opportunities in myriad areas. The Asian century is upon us and while the pie is large, margins are being squeezed constantly as the industry adjusts to a new normal and educates clients.

Issues in Asia: Entering the Market, Fees & Consolidation

Approximately 25 years into the Asian wealth management story, it is still an evolving and maturing industry. Issues of fees, outsourcing, consolidation, strategy and new market entrants continue to present both challenges and opportunities in myriad areas. The Asian century is upon us and while the pie is large, margins are being squeezed constantly as the industry adjusts to a new normal and educates clients.

The Perspective of the New Market Entrant There are many reasons why foreign banks are trying to enter the Asian market. In order to get the perspective of a new entrant to the market, we spoke to Eric Pedersen, CEO of Nordea Private Bank in Singapore, who explained that, “Nordea Bank is the largest retail bank in the Nordics. The strategy of the bank is to follow clients wherever they go. This led to Nordea Private Bank

becoming a recent entrant into the Singapore market, having acquired its private clients licence in June 2013.

“It has gone quite well since June. We are different from other banks insofar as our main client segment is well defined.

We are primarily here in Singapore to serve Nordic and European ex-pats. It is only on an exceptional basis that we book clients who are resident in Europe.

Our style is for the client to be more to the forefront. We are completely open regarding the choice of products available to clients. We don’t really have campaigns where you go and pitch specific funds to clients. We prefer to work on an individual level and are more transparent with regard to fees.

“There is a sizeable community of Nordic people in Asia. The research that we have done reveals that there are approximately 15,000 Nordic families in the region. This is not a huge operation and won’t be for quite a while. Nordea’s way is to grow slowly. We want there to be a match between how we like to

do business and the expectations of the client. We are not necessarily wellsuited for someone who trades a lot and has a brokerage mentality. It’s simply not how we operate.”

“I would say that the Nordea mentality is about looking each other in the eye and being transparent with everything that we do. We do not pick clients up in a limo and serve them champagne in the office, because our clients do not go for that type of thing. We want to make money and we want the client to make money, so keeping costs down is a part of that. I was once told I would never be successful in Asia because my watch is not expensive enough! But we are proud of fact that we fly economy and do not have fancy offices. It says a lot about who we are.”

“The average age of our account managers is over 40, so these are guys who have been through a crisis or two and therefore have a similar understanding to that of the client. This put the relationship on a more equal

footing. A client can sometimes feel more comfortable in this situation than with a 25 year old with spiky hair. We have heard of some clients complaining that RMs are too young and that there are frequent changes in personnel. We avoid that because we want continuity and stability in the relationship.”

What were the drivers that attracted Nordea to Asia?

“Our strategy is to follow our client base. We saw that a large part of our clientele that had been served out of Europe had actually moved to Asia.

People place value on regular meetings and on being in the same time zone. On top of that, Asia is an area where wealth is being created.”

Consolidation The cost issue that are abounding in the market have led to a number of marraiges of convenience between companies looking to share costs.

We sought a perspective on this from Stephan Repkow, CEO of UBP, who observed that, “There has been a lot of consolidation in the industry of late. To see how these trends will develop in Asia, you just have to look at Switzerland. UBP has been quite proactive in terms of the new trend of consolidation. We were one of first private banks to make a substantial acquisition when we acquired ABN Amro in 2011 and Lloyds. I think that is different from what’s happening in Asia right now though. For some it’s a question of getting critical mass. There are higher operating costs in the industry and that puts pressure on revenue lines and the overall profitability of wealth management services.

“When you consider the scissor effect of increased costs and lower revenue, it becomes clear that you can combat it by increasing assets under management (AUM) and become more effective by scaling up.

“UBP is a boutique private bank. This is the area we specialise in. Some big banks are pulling out because they have taken a different approach. Universal banks for whom wealth management is not a core business are now refocusing on their core businesses and getting out of wealth management. That doesn’t mean that they weren’t profitable and successful, it’s just that many boards have decided that now is a good time to go back to basics.

“At the end of the day, all banks have to improve productivity. The increasing costs of compliance necessitates it.

Being a pure play boutique private bank however means increasing the franchise within the private banking space, whereas for a universal bank, it now means scaling back. This is a trend that I think will last for a few years.”

Fees One cultural differnece between Europe and Asia is clients’ willingness to pay a fee for advice. Many new market entrants find this a troublesome stumbling

block. Yves Roesti of Solution Providers, discussing fees, commented that, “Many private banks remunerate on the overall result rather than on a transaction level profits – it is a trend that helps to revert the product push mentality at certain institutions. Compared to Europe, Relationship Managers (RMs) tend to be younger in Singapore and Hong Kong.

Usually the market heads have been through a few economic cycles, but the young people haven’t. We see sometimes that the attitude can be more about selling products rather than taking an advisory approach. In Switzerland, RMs must serve an apprenticeship along with a complimentary education before they can engage clients. Similar models are currently being discussed in Asia.

“Generally, the clientèle is vastly overbanked with 3-4 different banking relationships on average. Many use private banks as execution platforms and penetration rate of discretionary mandates are at a single digit percentage.”

DBS is an indigineous Singapore bank that has a well established presence in

the wealth management space throughout the region. Its singular focus on Asia leverages its local knowledge and concentrates it resources on all things Asian.

The Asia Focus DBS Bank

Ms Tan Su Shan, Group Head of Consumer Banking & Wealth Management, DBS Bank, Singapore describes the bank’s value proposition for private clients; “We are very much focused on driving our value proposition to offer holistic and innovative Asia-centric solutions and services to meet the needs of our clients, both at a personal and corporate level. Our objective is to become our client’s long term, total solutions provider with our deep knowledge of the region and the open architecture of DBS Private Bank.

“Hence, we continuously strive to leverage the best of DBS and combine our wealth management solutions with our clients’ wealth creation needs.

Our strong corporate and commercial banking franchise in Asia allows us to provide our Asian-based customers with regional connectivity and understanding of all our major Asian markets. These are invaluable to our clients, whose main business activities are centred in Asia.

“We believe that clients in Asia are looking for a private banker who understands their wealth creation process, and can add value for them in this respect. This includes having an in-depth understanding of the client’s business, and being able to help him grow his business while helping him hedge and diversify his risks. This means our bankers are more relevant to our clients in that they can provide customised solutions specific to clients from different countries and different sectors. For example, a Hong Kong property tycoon would have different needs from an Indonesian palm oil producer, or a Singaporean shipping magnate - each would require a tailored solution for their estate planning and succession issues, and may have specific individual needs arising from their sector or geography.

We are also focused on being known as a bank that offers “smart” and innovative solutions, to provide international clients with exposure to Asia’s growth, be it through investing in offshore renminbi (CNH) or capital markets products like IPOs, bond

issuances, etc. issued in Asian currencies, all of which DBS Private Bank is in a strong position to provide.

“We have a wide range of Asiacentric products and services including unparalleled equity and debt capital markets access. DBS Group has a strong and established presence in capital markets in the region, ranking #1 for SGX IPO and secondary offering equity listings, and #1 for SGD-denominated bonds issuances, with a market share of 14% and 34% respectively in 2012.

“Our clients can access and participate in key issuances in the region and have the opportunity to be cornerstone or anchor investors pre-IPO.We also demonstrate dominance in foreign currency opportunities. As Asian currency markets increase in depth, new currency opportunities, especially international renminbi (CNH), are very attractive. As the first private bank to offer CNH-denominated products, we

have dominated the market. We have also helped clients structure trades to benefit from mismatches in the swap market and capture other arbitrage opportunities.

Clients also have 24-hour access to the FX desk.

“Asian partnerships are key areas also.

DBS has significant partnerships in Asia to provide clients with exclusive access to unique investment opportunities in China and Japan with a 33% stake in Changsheng Fund Management, a joint venture fund management company in China, and 7% stake in Nikko Asset Management.

“During June 2013, in partnership with Nikko Asset Management, DBS Private Bank launched the Nikko Asset Management Japan Dividend Equity Fund for our clients, to capitalize on the recovering Japanese equity markets, supported by reforms and changes under Japan’s new economic policy, “Abenomics”. Innovative thematic funds

“We are very much focused on driving our value proposition to offer holistic and innovative Asia-centric solutions.”

Tan Su Shan, Group Head of Consumer Banking & Wealth Management, DBS Bank

are therefore another important offering.

“We offer our clients seamless connectivity across our network of key Asian markets, whether it’s online trading, payments or mobile transactions.

Finally we combine innovation with an understanding of fast-evolving customer trends and behaviours to reach out to our clients.

“DBS is uniquely placed as we have a growing presence in Asia’s three key axes of growth, Greater China, South Asia and Southeast Asia. This allows us to seamlessly serve our customers across the region. Whether they are instant cash transactions to any bank in India for our global NRI clients to sourcing of deals in Greater China or ASEAN markets, we can access our network of clients, knowledge, ideas and deal flows to capture opportunities for our customers.

“We are empowering our clients with a full suite of online innovations as part of our forward-looking digital communications strategy. While High

Net-Worth Individuals continue to value the professional service and advice of a relationship manager, increasingly, many also want the convenience and empowerment that comes with being able to conduct banking activities and gather financial insights personally, wherever they may be, at any time of the day.

“Hence, we are putting all these elements at our clients’ fingertips. Convenience and accessibility are crucial for our clients. In July 2013, we launched a redesigned DBS Private Bank website, providing clients with quick and easy access to market news and data, as well as research and information about our products and services. We will also be launching an eAppointment tool, where clients can book appointments with their RMs efficiently. We are also adding live chat and secure mail functions for our clients’ convenience.”

Trusts & Wealth Planning

In the Middle Ages, knights setting out to join the Crusades gave their possessions to a person who was entrusted with their safe keeping. The trustee would hold the possessions for designated beneficiaries.

Over the centuries, the Chancery developed the principles of equity to “mitigate the harshness” of the common law, and the equitable structure of the trust was developed. Today, common law trusts are still used for asset protection and as vehicles with which individuals can pass possessions onto beneficiaries by utilising a third party trustee.

“In terms of the process of working with clients, the starting point is a discussion of what they wish to accomplish in terms of succession and asset protection.

Clients have worked hard to accumulate wealth and are concerned to see that it is protected for future generations.

We must consider a multitude of asset protection concerns. This will involve a discussion on issues such as who the beneficiaries are, what assets are involved and in which locations, cross border tax ramifications, the possible impacts of beneficiaries living in different jurisdictions and issues of common law C.E.O. Financial spoke to Carolyn Butler, and legal marraiges.

CEO of the Hong Kong Trust Company which provides professional trusteeship, “We have to get them to think about fiduciary services, fund and private thorny issues like divorce as clients equity administration and corporate have to be aware of the implications services for individuals, family offices, of a divorce on a trust in different intermediaries and corporations. jurisdictions. Prenuptial agreements for sons and daughters must also come into What are the most important consideration. In Hong Kong, the divorce rate is 50%, so unfortunately these issues to be considered when eventualities must be anticipated.”

structuring a trust?

“We must consider a multitude of asset protection concerns. What is important is the guidance of trustees vis-a-vis the trust.”

Carolyn Butler, CEO, The Hong Kong Trust Company

“We have no tied affiliations with banks or professional firms. We can therefore offer independent advice to clients because there is no conflict of interest or pressure on us to market any particular product. The needs and requirements of the clients are foremost in our minds at all times.

Our in-house specialists implement tailor-made structures according to the specific needs of each client.

“Our priority is to understand the current requirements of our clients with a view to anticipating and therefore incorporating future needs.

Our independent status gives us the flexibility we require to create collaborative solutions that fit the particular needs of each client. When it comes to wealth planning, there are many eventualities to be considered.”

Katie Graves, Partner at law firm Withers Worldwide explained that, “We have had know your customer (KYC) procedures for years now.

The issue is explaining to clients

that wherever they are going put a structure, it will have to be compliant.

Many people have nothing to hide, but still want privacy. Then there are people with historical issues that they need to deal with. Henceforth, disclosure is something that clients will have to live with.”

Dr. Angelo Venardos, Founder and CEO of Heritage Trust Group, Singapore, with offices in Hong Kong and the BVI, describes the trust business thus, “Our business concerns the provision of trustee and fiduciary services for wealthy individuals in Asia, who are starting to realise the need for effective estate and succession planning tools that utilise the advantages of English common law trusts.

“In dealing with our clients, our most important discussions arise from the three Ds; Death, Divorce & Disputes.

A trust is a contract which ensures that estates are left in an orderly manner

“Much of the wealth generated in Asia in recent times is still quite illiquid and tied up in real estate and the family business.”

Nigel Rivers, Global Head of Private Clients, TMF Group

for the beneficiaries. In civil law jurisdictions like Indonesia, clients are often more comfortable with foundations, which are legal entities.

“Clients in Singapore are entitled to confidentiality and we think that it is reasonable considering that people don’t want to put their families at risk of kidnap and ransom. We will not however, allow people to take advantage of laws designed to protect legitimate interests, in order to evade tax. Most clients are looking for a safe haven not necessarily a tax haven.”

Nigel Rivers is Global Head of Private Clients for TMF Group. He explains that,

using trusts, foundations, companies and other special purpose vehicles.

“In providing fiduciary services to private clients, we act as either trustees or administrators, or both.

There are a number of aspects that differentiate our offering from the trustee services provided by most private banks. We look to provide a complete solution for our clients across all asset classes. Being independent from asset management is a key aspect of our offering. It enables us to avoid potential conflict of interest between our fiduciary obligations to the client on one hand and the interests of asset management on the other, and allows us to engage the best asset managers for the trust purposes. Therefore, the choice of investment manager and custodian bank is based on performance and expertise. “

“TMF Group has eleven service lines, one of which is for Private Clients. This consists of a variety of services which we utilise to achieve “Much of the wealth generated in Asia the individual objectives of the client regarding wealth asset administration in recent times is still quite illiquid and succession planning. These include and tied up in real estate and the core

“Wealthy individuals in Asia are starting to realise the advantages of English common law trusts.”

Dr. Angelo Venardos, Founder & CEO, Heritage Trust Group

wealth generator for a family, the family business. This type of asset can present difficulties for trustees, especially those not equipped to manage such illiquid assets. With regard to TMF Group however, this is our core business. We want to provide a full service solution for our clients and our experience in structuring these assets is crucial.”

provides these kind of services on an international basis means that we have a deep appreciation for the extent to which regulatory changes in one jurisdiction may affect business elsewhere. We have extensive capabilities and a global presence.

Our size and global reach gives confidence to prospective clients that they will be in good hands.”

“In recent years, most countries have updated their own regulation and legislation. Administratively, cross-border asset ownership can be more burdensome than before. This also represents an opportunity for corporate service providers such as TMF Group. The regulatory changes that have taken place throughout many jurisdictions have made some trust companies re-evaluate a number of their services and increase their focus on their core business.

Providing fiduciary services to private clients is our core business.

Being the largest independent that

William Ahern, a Australian national, is the founder of Family Capital Conservation. He is a consultant in tax, succession and family governance, who operates a different business model in order to serve his clients, “We help families with regard to succession and tax, but in some ways the most important aspect of our work is family governance. We assist families in writing a family constitution that provides a set of rules that a family adopts for itself to make sure that the family relates to

“Not every family needs to necessarily have their own trust company. Most should probably use a professional trust company, depending on the assets they have.”

William Ahern, Founder, Family Capital Conservation

the family businesses in professional way. One aim of this is to create communication channels to prevent family emotions from becoming involved with the professional running of the business. The overall goal is to take a holistic view of family and family business and build an enduring family estate.

have their own trust company, to have the administration side done by a professional trust company. In this way I am a user of trust companies, not a competitor. Not every family needs to necessarily have their own trust company. Most should probably use a professional trust company, depending on the assets they have.”

“There are three main threats that are faced by high net worth families; death, divorce and dysfunction. Having a constitution that the whole family subscribes to enables these life events to be navigated more smoothly.

Jay Krause, partner with Withers Worldwide, explains how trustees are effected when complying with the provisions of the Foreign Account Tax Compliance Act, (FATCA), arising from the United States,

“I am not a direct competitor to trust companies because I don’t act as a trustee. I am at the table on same side as the family, as an advisor. I act as part of the family team, like an inhouse counsel.

“This is a complex area, but broadly speaking, the trust companies will find themselves classified as foreign financial institutions (FFIs) and will need to adhere to FATCA provisions in order for them to become compliant at all levels and escape the 30% withholding tax on assets in the United States.

“As a project manager, I look at the issues from their point of view and often advise clients, even when they

“It is a common misconception that a trust company can meet its obligations by merely having the trustee register for FATCA, but in actual fact the trust itself and the holding company must register.

“Trusts and holding companies are required to produce new W8 forms certifying that they are have attained FATCA compliant status. Trusts are possibly the most complex area of the FATCA legislation.”

Offshore Financial Centres & Regulatory Arbitrage

The international offshore system comprises a multiplicity of offshore financial centres, all of whom compete to attract the trusts, special purpose vehicles, companies and high net worth individuals (HNWIs) to their shores in return for zero, or next to zero tax rates, light touch regulation and reticence with regard to sharing information with foreign governments.

The OECD, FATCA, AML and the global drive for tax transparency are changing the face of the industry considerably. Increased information sharing between jurisdictions, once not countenanced, is now becoming more commonplace and is set to continue in that vain. The OECD’s “Global Report Card” compares and contrasts the compliance of offshore jurisdictions with the agreed OECD guidelines for information exchange between jurisdictions for tax purposes.

Grades are attributed to jurisdictions that range from “A - Compliant” to “D - Non Compliant”. This illustrates at a glance to effects of regulatory arbitrage and the ongoing fears surrounding capital flight in this time of change. Here, we explore some of the regulatory regimes in operation in different jurisdictions and seek to get a sense of the evolving situation.

The Channel Islands The channel islands of Jersey and Guernsey are Crown protectorates and de facto extensions of the City of London. They are concerned about their image internationally and want to be seen to be transparent, best practice offshore jurisdictions.

Marcus Hinkley is Group Partner and head of the Singapore office of Collas Crill, a law firm that expanded recently into Asia,

“Mid-shore jurisdictions like Hong Kong, Singapore and even Ireland can use their ring fencing legislation to benefit from the migration of trusts, funds and special purpose vehicles from less transparent offshore destinations.”

Marcus Hinkley, Partner, Collas Crill

“Collas Crill is an offshore law firm originally based in Jersey and Guernsey. In mid 2011, the firm established an office in Singapore.

The Singapore office specialises in structuring trusts for HNWIs and funds for investment managers.”

Hinkley, an expert in the field of trusts law, describes the manner in which clients typically engage the firm, “In Jersey and Guernsey, business would typically come via intermediaries, be they other offshore lawyers, private banks, asset managers or trust companies. In Singapore however, it is quite often that HNWIs would approach us for our services.

This is because Singapore is small and there is a higher than average number of HNWIs per capita.

“Of course, as an offshore law firm, we only perform advisory work in Singapore and execute all of our legal work in Jersey or Guernsey. From a

trust lawyer’s perspective, Jersey is the pre-eminent jurisdiction. It has the longest history of trust law in the world and the biggest infrastructure for supporting trusts. All of the major firms are present and there is an active judiciary that lead the way in terms of case law in the area. All of the professionals are UK-qualified and, of course, there are very strong links with Britain. It’s a very stable and reliable legal environment for offshore trusts.

“IFCs like Jersey and Guernsey are well placed to deal with these forthcoming changes, as they have continually been at the forefront of innovative offshore legislation.

Jurisdictions like the BVI for example however, have a lot of catching up to do. In many ways, they are victims of their own success.

“When these measures are implemented and come into force, midshore jurisdictions like Hong Kong, Singapore and even Ireland can use

their ring fencing legislation to benefit from the migration of trusts, funds and special purpose vehicles from less transparent offshore destinations”.

Marcus Leese, partner at offshore law firm Ogier explains a similar business model, “Ogier has five “home” jurisdictions whose law we practice; BVI, Cayman Islands, Guernsey, Jersey and Luxembourg. These are all well known offshore financial centres.

“Our offices in other locations are directed specifically towards client service. Our Tokyo office for example, does not practice Japanese law, but it has a local staff to develop and manage relationships with Japanese clients who require offshore advice. “We can then assist with the actual legal work in our Hong Kong and/or home jurisdictions.

“Clients find it very valuable to have legal advisors able to provide advice in the clients’ own time zone. This is a particular focus of our Hong Kong office which is a base for lawyers from BVI, Cayman, Guernsey and Jersey to assist clients in Asia.

“In the past, offshore financial centres differentiated themselves and competed principally on the basis of the services and products that they offered, so that if a particular legal regime was offered with regard to a certain industry, that became an attractive point for that jurisdiction.

“Guernsey for example, pioneered the differentiation with the development of cellular companies in 1997. This was eventually copied by others, but it made Guernsey very attractive at that time and it was how they differentiated themselves.

“Both Jersey and Guernsey also chose to differentiate themselves by emphasising regulation at an earlier stage than many other jurisdictions and this has put them in a good position given the increased regulatory focus globally. Jersey and Guernsey have been at forefront of increasing regulatory standards. They have a good framework combined with flexibility.”

“In the last few years, there has been a huge amount of media rhetoric about offshore centres, tax evasion and tax avoidance. Not everything that people have heard is accurate. The reality of dealing with leading offshore centres is very different from that which many politicians and commentators would like to suggest. All clients that we see use offshore centres for entirely legitimate purposes, attracted by the convenience, cost-effectiveness, appropriate corporate governance and high service standards which are

available. It is absolutely not the case that offshore centres are ‘sunny places for shady people’.”

Singapore Dr. Angelo Venardos, Founder and Chief Executive of Heritage Trust Group, based in Singapore (with offices also in Hong Kong and the BVI), is passionate in describing the city-state as a well-regulated destination.

“In Singapore, there are two regulatory initiatives, there is FATCA from the United States and there is also Singapore’s own legislation which criminalises money laundering.

Singapore is keen to be ahead of regulatory curve and close any regulatory loopholes there may from business coming out of Europe.

“Singapore does not want to be caught

In actual fact though, Singapore up in European tax and regulatory issues when there is more than enough isn’t interested in that. Rather, it is interested seeing the private market business in Asia. mature in a well-regulated manner.”

“The government is therefore keen to ensure institutions are well regulated, Labuan IBFC conducting best international practice The Malaysian Offshore and maintaining high standards. The Financial Centre focus is on China, India, Indonesia and Malaysia - it is therefore a very Labuan International Business and specific focus on Asia.

Financial Centre (Labuan IBFC) is an offshore destination in Malaysia that “Singapore wants to lead the way buffers the financial services industry in this area and is one of few in Kuala Lumpur. The connection jurisdictions where the providers of with the Malaysian capital ensures a trust services must be licensed by well-regulated environment that does the Monetary Authority of Singapore not tolerate discrepancies.

(MAS). Currently, there are 53 licensed providers in the jurisdiction.

CEO of Labuan IBFC, Saiful Bahari Baharom explains that, “The Singapore business model is a well-regulated, financially sound “Labuan IBFC has been earmarked environment based on the principles as an offshore financial centre to be of English common law. It’s generally promoted internationally. Once we acknowledged that Singapore will acquire clients, manage their wealth eclipse Switzerland in terms of assets and sell products, there is a whole under management (AUM) by 2020.

“We cannot risk the reputation of Malaysia. That is why we have a robust regulatory framework.”

Saiful Bahari Baharom, CEO, Labuan IBFC

host of trustee, custody, tax and legal services that we can provide.

“Corporate entities incorporated in Labuan IBFC are taxed at 3% or can elect to pay a flat rate of 20,000 Malaysian Ringgit. An investment holding company with no trading activity however is subject to 0%.”

is not dependent on revenue from the offshore centre, so we can pick and choose the business that we want to do.

We do not want to be a sunny place for shady people. We seek to follow best practices.”

Established in October 1990 as an international offshore financial centre, Labuan IBFC began making changes in the way the jurisdiction operates Distinction from 2008 when it re-named and repositioned itself as Labuan IBFC in “What makes Labuan IBFC distinct is keeping with its goal to be the premier our association with Kuala Lumpur. international business and financial We cannot risk the reputation of centre in the Asia Pacific region.

Malaysia, and as such, we have a In line with this objective, Labuan robust regulatory framework. In this way, we believe that our affiliation with identified five key areas of focus, namely, company incorporations, the Kuala Lumpur Regional Centre Islamic finance, insurance including for Arbitration enhances the stature of captive insurance, private wealth Labuan IBFC as a preferred business management and fund management. A destination. We are not replicating the BVI or other offshore financial centres. dedicated unit, Labuan IBFC Inc., to market and promote Labuan was set For the most part, they are states up, followed by the legislative changes. unto themselves and their revenue Well supported by a robust, modern comes primarily from the offshore and internationally recognised legal industry. In Malaysia’s case, the state

framework, Labuan IBFC provides clear legal provisions and industry guidelines enforced by its regulator, Labuan Financial Services Authority (LFSA).

(TIEAs) signed by Malaysia. It is not a secretive jurisdiction and it has put in place compliance requirements to ensure it remains a well-regulated jurisdiction – stringent in regulatory compliance, yet provide Since 2009, Labuan IBFC has an environment for business stability expanded its network of cooperation with legal and tax certainty. Guidelines via Memoranda of Understanding on and directives are regularly issued to cooperation and mutual assistance with assist Labuan investors in matters of other authorities such as Mauritius’ compliance.

Financial Services Commission, Maldives’ Monetary Authority, the “Having the ability to strike the right National Bank of Tajikistan, the balance between legal certainty and tax European Securities and Markets efficiency gives us a unique advantage Authority (ESMA), Taiwan’s Financial as a fast emerging “midshore” Supervisory Commission, the UAE’s international business and financial Securities and Commodities Authority, centre in the region,” added Baharom.

Tunisia’s General Insurance Committee and Malaysia’s International Centre Labuan IBFC subscribes to for Education in Islamic Finance international standards and regularly (INCEIF), among others. reviews its legislation to keep abreast of changes internationally in an effort Labuan IBFC cooperates fully with to maintain the standards of a wellother tax authorities to prevent tax regulated international financial centre. evasion and money laundering as It is a member of several international Malaysia is a member of the OECD organisations that promote a high Global Forum on Transparency and level of regulatory standards amongst Exchange of Information for Tax international financial centres, Purposes. Labuan, being part of namely the Group of International Malaysia, was reviewed together in Finance Centre Supervisors (GIFCS), both Phase 1 and Phase 2 of the OECD International Organisation of Securities Peer Review.

Commissions (IOSCO), Group of International Insurance Centre “Labuan IBFC is not a tax haven. It Supervisors (GIICS), International has put in place relevant legislation to Association of Insurance Supervisors allow exchange of information with (IAIS), International Islamic Financial tax authorities of Malaysia’s double Market (IIFM), Islamic Financial tax treaties partners as well as tax Services Board (IFSB) and Asia/Pacific information exchange agreements Group on Money Laundering (APG).

Incorporated in Hong Kong and a Registered Trust Company under the Hong Kong Trustee Ordinance and the Hong Kong companies Ordinance, The Hong Kong Trust Company Limited provides professional trust, fiduciary and administration services to support high-net-worth private clients, family office, corporations and funds.

Specifically, The Hong Kong Trust Company provides trusteeship, custodial and fiduciary services for clients wishing to set up trusts or custody relationships for the protection of international assets, wealth planning, estate management and tax structuring, and also provides a full range of establishment and administration services to Investment Funds and Private Equity Structures.