Rather than shoehorning clients into predesigned investment strategies, discretionary portfolio management should take a bespoke approach that reflects clients’ objectives, according to Johnny Heng, Head of Relationship Management for Wealth Management in Asia ex-Japan.
In past decades, discretionary portfolio management was seldom used by clients in Asia because the region was at an early stage of wealth. The majority of wealth management clients were first or second generation wealth creators. Typically, such individuals are accustomed to being in full control of investment decisions; they therefore tended to take an execution-only approach to wealth management.
As wealth has transitioned to the next generation, a new approach is emerging. Younger clients have new ideas about wealth and have different priorities. Moreover, in many cases there may be several siblings in a family, with no single person willing to take responsibility for investment decision-making. Consequently, it can make more sense to entrust wealth management to a professional.
At the same time, discretionary portfolio management has now been available in Asia for many years, increasing people’s familiarity. Clients have become more aware of the potential opportunities it offers, such as accessing investment classes in which they have little expertise or do not have the time to do necessary research.
For example, many business owners will be familiar with their own markets and, to a lesser extent, other equity-based investments. They are likely to be less familiar with fixed income and rarely have the skills and specialization required to perform credit analysis and due diligence on issuers. In such circumstances, discretionary wealth management can offer a valuable diversification of investments at lower risk.
Approaches to discretionary management vary widely
Traditionally, discretionary portfolios managers have sought to differentiate themselves by highlighting the skills of their portfolio managers. To be sure, investment expertise is an important component of any discretionary wealth manager’s performance. However, it is equally critical to ensure that a client’s portfolio is aligned with the needs and the expectations of the client.
Before any investment is made, it is essential to get the basics right. Discretionary wealth managers must spend time talking to their clients to carry out a detailed analysis of their needs. All too often, private banks take a prescriptive approach to this process. Instead of carefully considering the individual requirements of the investor, they simply assess the person’s risk tolerance and then allocate their funds into one of a handful of standard portfolios. For the wealth manager, this is advantageous because it reduces complexity and enables them to lower costs. However, the failure to understand the nuances of a client’s approach to risk, investment objectives, and broader wealth goals can lead to misunderstandings and ultimately to disappointment.
The potential implications for performance are demonstrated by an example where a client allocates a similar amount of capital to two different wealth managers and outlines their conservative approach to risk. A typical wealth manager will likely reflect that risk tolerance in terms of the balance between equity and fixed income allocation. In contrast, a wealth manager that makes a more detailed analysis of the client’s risk appetite might learn that the investor is willing to accept lower returns provided the portfolio has low volatility. They can use this insight to construct an optimized portfolio that limits trading in order to lower overall costs. This low cost, low volatility approach has the potential to outperform the approach taken by a typical portfolio manager despite having lower risk.
Taking a holistic view of portfolio management
Just as trading and other costs are often ignored when constructing a portfolio, many wealth managers fail to take account of a client’s foreign exchange exposure. When an individual is holding cash, perhaps because they are anticipating a market correction, they are nevertheless making an investment choice: every currency has different characteristics and will perform differently.
An astute discretionary portfolio manager will discuss clients’ currency views in detail and take them into consideration when constructing a portfolio. By applying such views, significant value can be created. In one recent example, a client with a negative outlook on the euro chose to borrow in that currency in order to finance a US dollar discretionary portfolio. As the euro weakened, the client’s loan costs fell while the value of the portfolio increased.
It is important that clients and advisers maintain an active dialogue. In the above example, the portfolio manager made the client aware when the euro reached a level where a rebound became probable, which would undermine the rationale for the trade. Equally, advice on currencies must be holistic – taking into account their exposure across their various portfolios and businesses.
Frequent engagement is also important so that the portfolio manager can understand the evolving concerns and expectations of the client. This dialogue should be transparent and the portfolio manager’s interests must be aligned with those of their client. Unfortunately, this is not always the case at many wealth managers.
For instance, prior to the US presidential election many clients were cautious and retained as much as 20% of their portfolio in cash. Most wealth management firms would simply retain the cash and continue to charge fees on it. In contrast, a firm with the client’s best interests at heart would encourage them to hold the cash themselves so that no fees are payable: when opportunities appeared as the election date approached, the funds could be brought in-house for deployment.
Honesty and openness should characterize adviser relationships
Discretionary portfolio management should aim to create a trusted partnership between client and adviser. The approach taken by Nomura Wealth Management, which offers discretionary portfolio management in Singapore, is to build trust through its actions and policies. Nomura Wealth Management only trades where it adds value and benefits the portfolio. Indeed, this approach is reflected in the bank’s fee structure. Whereas most banks charge a management fee and transaction fee, Nomura Wealth Management charges only a flat fee. There is therefore no incentive for the portfolio team to transact for the sake of it. Similarly, where they are available Nomura Wealth Management invests in institutional share classes, which carry lower costs; many banks select retail share classes, which are more expensive for clients but offer rebates for banks.
Nomura Wealth Management’s commitment to honesty and openness also extends to its investment policy. While many advisers favor in-house funds, Nomura Wealth Management – which focuses solely on classic asset classes in order to ensure liquidity – has a ’best sourcing’ approach. In every instance, the most effective and cheapest way possible to gain exposure is selected. Where portfolio size requires it, active funds or exchange traded funds are used (either by themselves or in combination) to ensure the portfolio takes into account the individual’s needs. Rather than slotting clients into predesigned portfolios, Nomura Wealth Management uses its scale to take a more bespoke approach for clients in Singapore.
As wealth increasingly moves to the second and third generation, the shift away from a trading mentality towards a more holistic type of wealth management will gather pace. As a result, clients will increasingly value honesty, prudence and discipline when selecting their discretionary portfolio manager. Over many years, Nomura has built a wealth management business that encapsulates these values in its structure, approach to fees, client engagement model and ability to deliver value. The bank’s aim is to become its clients’ partner in investment by putting its expertise and capabilities at their disposal to help them achieve their wealth objectives.Read more