Wealth management in Asia has traditionally been dominated by traditional financial institutions. In recent years, however, as Asian markets matured and the number of high-net-worth individuals (HNWIs) in the region has spiked, External Asset Management (EAM) organisations have begun to fill the niche for bespoke services with more competitive pricing.

An EAM is an independent asset manager that provides services to clients who wish to outsource the investment management of their assets. This can include services ranging from portfolio design and implementation to investment research and monitoring. Unlike large financial institutions with hefty overheads, external asset outfits often incur lower operational and maintenance expenses, and provide specialist solutions for making capital investment decisions.

Based on the Monetary Authority of Singapore (MAS)’s 2020 Singapore Asset Management Survey, “Singapore – The Asset Management and Sustainability Centre in Asia Pacific”, Singapore’s Assets under Management (AUM) grew in tandem with the global trend, rising by 17 per cent in 2020 to reach $4.7 trillion.

Today, Singapore serves as the gateway for global investors to access Asian investment opportunities, and for Asian investors to maximise international investment opportunities, in part due to its political stability, strong governance and pro-business policies.

To better understand the EAM trend, The Business Families Institute at Singapore Management University (BFI@SMU) has released the BFI@SMU Research Report on “The Growing Ecosystem of Wealth Management in Singapore: Lenses on the External Asset Manager”. The knowledge leader in Asian-centric family business research and education conducted a survey with EAMs to gain insights on how sustainable growth can be achieved for the industry.

According to the report, despite the economic challenges faced in 2020 triggered by the pandemic, the country’s AUM continued to increase. This led to a boom in private banking asset management capabilities, as well as a trend of senior private bankers venturing into their own asset management practices tailored towards high-net-worth clients. Here are the six other factors that are set to propel the burgeoning EAM landscape:

1. Adding value to family offices

The number of family offices in Singapore has grown in recent years, in part thanks to its strategic location, trusted legal system, talent pool of investment advisers and regulatory framework that allow overseas and domestic entities to easily register funds in Singapore and enjoy tax benefits if a locally-based fund manager is utilised. The trend has spurred the growth of the EAM landscape, with billionaire wealth managed in the city-state spiking by 30 per cent between April and July 2020, to reach US$102.6 billion.

External asset managers have the ability to build long-term relationships with clients and develop a customised approach to wealth management, as they do not face short-term revenue targets that they would otherwise face in a Financial Institution. This enables EAMs to build stronger, more trusted relationships with end clients — a critical driver for growth. In fact, 80.49 per cent of the report’s EAM respondents believe that high-quality client relationship management and engagement standards with ability to offer niche solutions bring the greatest value-add to family offices.

Besides its human-centred model, the EAM’s expertise in asset management and specialist investment strategies adds value to family offices. To better cater to family offices, about half of the report’s respondents aim to expand their offerings to succession planning, and gain a better understanding of the operations of family-owned businesses.

2. Greater acceptance of management fee model

Traditionally, clients make the final decision on trades and pay commission fees based on the volume of trades executed. However, clients are increasingly open to a discretionary portfolio management (DPM) approach, whereby asset allocation and portfolio construction choices are made on behalf of the client. In turn, the client pays a management fee for the EAM’s services.

The DPM approach reduces potential conflicts of interest between the EAM and the clients, as EAMs are not incentivised to push trades that are not in the best interest of the customers, as is the case when retrocession fees are employed. Retrocession fees are the commission fees that the brokerage would rebate to the EAMs, and constitute part of the revenues of the EAMs. In turn, the management fee model offers greater cashflow stability for EAMs. 93 per cent of respondents reported that they have included management fees into their overall revenue model.

3. Support from the MAS

The MAS has developed a robust ecosystem to support Singapore-based asset managers and ensure they have access to resources that can enable their businesses to thrive during a Covid-19 endemic and beyond. Over 60 per cent of survey respondents are aware of support from MAS in grant applications and regulatory compliance, while 37 per cent are aware of digital acceleration grants from the regulator.

4. Partnerships with custodian banks

EAMs are independent advisors who can collaborate with multiple custodian banks to gain access to different capital markets, investment products and solutions. While EAMs currently face challenges with the time-consuming process of onboarding and a lack of a strong digitalised client data management system with custodian banks, private banks are beginning to set up dedicated desks to better manage their EAM partnerships.

5. Adopting an open architecture

In wealth management, open architecture refers to a system that allows clients access to in-house as well as third-party products and services. As such, over 50 per cent of respondents advocate adopting an open architecture, and the authors of the report anticipate a move towards “an open architecture platform that enables a seamless onboarding process in partnership with custodian banks”. Such partnerships with other financial institutions will give rise to greater business opportunities, and open doors to resources that can lead to improved operational efficiency.

6. Growing a thriving ecosystem

The broader financial landscape in Singapore has been supporting the growth of an external ecosystem that fuels the symbiotic growth of the EAM sector. However, the evolution of the existing ecosystem to include working groups that engage in dialogue with MAS, the network of family offices, banks, tax and compliance experts, an EAM association, and academic partners will further amplify the EAM industry’s prominence in the wealth management space. For example, three-quarters of respondents expect more support from MAS to address the pain points of compliance and regulation, while over 70 per cent also hope for greater clarity and assurance from the authorities in growing the EAM ecosystem.

Singapore has emerged as the go-to hub for asset managers and sophisticated investors in Asia because of its outstanding financial and professional infrastructure. By leveraging on emerging trends and maintaining its competitive advantage, the future of EAMs in Singapore will indeed be bullish with ample opportunities ahead.

To download and read the full report, simply fill in your details here.