Navigating the World of External Asset Management: A Comprehensive Guide

External Asset Management is a burgeoning field that offers private wealth owners a unique set of benefits that traditional banks often find challenging to match. This article explores the definition, elements, business model, and critical considerations of EAM, providing insights into why it's becoming increasingly popular in regions like Switzerland, the United Kingdom, the USA, Hong Kong, and Singapore. The wealth management industry is changing significantly, and External Asset Management is one of the drivers.

Definition and Key Elements

External Asset Managers (EAMs), also known as independent asset managers, manage financial assets on behalf of others without taking such assets into custody. They operate outside the traditional banking structure, offering clients a wide range of products and solutions. Unlike banks, EAMs don't hold clients' assets; they work with a licensed bank acting as custodians.

Independence and Flexibility

One of the most appealing aspects of External Asset Managers is their independence. Since they are not affiliated with custodians, they can offer continuity and flexibility in service provision. This independence allows clients to select from a wide range of products and services, leading to a more personalized and less standardized advisory process.

The External Asset Management Value Proposition

External Asset Management is known for its unique selling propositions, such as independence and personal client relationships. They can help clients choose appropriate solutions tailored to their needs, something that large wealth and asset management companies may struggle to provide.

The Business Model

The External Asset Management business model involves three contractual relationships: the investment advisory or asset management agreement with the EAM, the custody agreement with the custodian, and a cooperation agreement between the EAM and the custodian. This triangular relationship ensures optimal results, aligning interests for tailored and flexible solutions.

Alignment of Interests

EAMs focus on the relationship with their clients, providing sophisticated asset management services. They share risks with clients, ensuring a greater alignment of interests. The partnership between EAM and custodian is essential for quality and client satisfaction, with collaboration in areas like onboarding and data transmission playing a crucial role.

Revenue Potential and Collaboration

Custodians recognize the importance of External Asset Management and offer dedicated platforms and teams. Though revenues may be smaller, the lower acquisition and administration costs make it an attractive opportunity for custodians. Collaboration between banks and EAMs, such as through blockchain technology, can enhance client service by improving information and data exchange.

Services Offered

EAMs maintain a trusted relationship with clients, offering comprehensive financial advice. They manage clients' assets following defined investment strategies, select financial instruments that meet client's needs, and execute transactions. Their core services include comprehensive market analysis, portfolio construction, trading, and risk analysis.

Fee Models

External Asset Management offers various fee models, including assets under management fees, performance-based compensation, fixed fees, and other compensation models. The choice depends on factors like complexity, performance, and client preferences. Transparency and alignment with value are essential in fee arrangements.

Selecting an External Asset Manager

When choosing an EAM, considerations include independence, transparency, performance, service quality, collaboration capabilities, pricing, and process efficiency. A structured selection process, possibly assisted by independent advisors, can help identify specialized EAMs that align with the client's interests.

Regulation

In Switzerland, EAMs must be licensed by FINMA and controlled by a supervisory organization. Regulation ensures consumer protection and adherence to the highest standards, influencing processes and organizations for enhanced service quality.

External Asset Management offers a personalized, flexible, and diversified service that reduces the risk of conflicts of interest. They provide individualized solutions, quick decision-making, alignment of interests, and a focus on client needs.

For clients seeking a long-term, trusted relationship with a financial intermediary, EAMs present an attractive option. Their independence, specialization, and commitment to client satisfaction make them a valuable alternative to traditional wealth and asset management offerings.

By understanding the intricacies of External Asset Management, wealth owners can leverage this unique model to obtain more clarity on investment decisions, performance impact, and personalized solutions. The global trend toward External Asset Management reflects a shift in the financial landscape, emphasizing independence, transparency, and alignment with the client's best interests.

Despite all the benefits of the business model, it is still essential for wealth owners that they implement a control function to ensure optimal results.