By GENEVIEVE CUA
CHARGING a fee for advice used to be unheard of among private banks, but that may soon change as clients gravitate towards a new niche of 'independent asset managers'.
A number of clients are beginning to entrust the oversight of their banking relationships to independent managers, an arrangement which should bear fruit in greater efficiency, cost savings and - perhaps most coveted of all - independent advice.
The recent crisis has woken clients up to the hard realisation that banks that hard-sell products do not always have their interests at heart.
Taurus Wealth Advisors, founded by banking veteran Mandeep Nalwa, is setting out to be one such independent adviser for high-net-worth individuals. It is unclear how many such firms have emerged. But one of the largest to date is AL Wealth Partners, set up by Anthonia Hui in 2007. Ms Hui herself has had some 30 years of banking experience.
Mr Nalwa was formerly a private banker for some 15 years with such firms as Deutsche Bank, Merrill Lynch and HSBC. He believes that the only way to give truly impartial advice is for the adviser to be compensated by the client, rather than by product providers.
'I could see there was a huge conflict of interest in banks. It essentially boiled down to compensation. You work for the person who compensated you. Until one could shift that direction of compensation, one could not remove the conflict of interest ...
'My idea was to continue to garner experience as I worked in banks, and to wait for a recession. Then we begin to offer advice as it's only in bad times that people respect advice. In good times, people believe they are geniuses.'
Taurus was set up in April 2008. Today there are six in the team, advising on assets worth roughly US$300 million. Mr Nalwa expects to double the assets under advisory by next year.
'Our premise is to give honest and objective advice. We decided that compensation will come only from customers.' Clients generally pay a flat fee for advice which could start from between 40 and 50 basis points of the value of the assets. Some clients may opt for a profit-sharing arrangement.
'When you look for an adviser, the only thing to look for is ethics. Knowledge is the last thing. All banks can provide information, but if the ethics are suspect the client will run into problems. Unfortunately for a lot of clients, the most aggressive bankers did very well in 2004 to 2007. The more experienced bankers didn't do as well, as we were not as aggressive. The tsunami wiped everyone out, but people who were circumspect did better. It boils down to ethics.'
Clients' assets continue to sit in their respective private bank accounts. But the value-add the firm brings is its independent view, which it arrives at after perusing research from almost all the banks. It is able to access investments and placements that clients may be able to on their own. It can negotiate fees and provides a single interface for clients, which saves them time and costs. It can also advise on assets outside the accounts, such as real estate.
While the firm has clients with asset sizes exceeding US$100 million, getting more to sign on remains a challenge. Each client has accounts in four to six banks.
'When I was in banks, I suffered the same pressures as everyone else. I told clients that if you paid a flat fee for your account, you reduce (the conflicts). There is less of an incentive to over-trade and churn the account. But clients were not comfortable with that.'
He adds that clients' usual practice of playing one bank against another does not result in objective advice. 'A banker calls to sell a product. The client calls a competing banker to ask - what do you think? If I'm the competing banker, I'll temper my advice even if I think it's great. I'd rather muddy the water a bit, so the client doesn't do it now. Then two weeks later, I may go back with something similar with a different name.'
He says the firm is not competing with the private banks, although more junior relationship managers may view it as competition. 'We tell clients, if the banker is good, we're in a better position to assess that. Those bankers will get more business than they normally would have.'
Track record will be key to enlisting more clients. The firm plans to launch a macro fund in October, through which it can execute ideas. 'The fund should be our best ideas, and should generate 6 to 8 per cent in returns,' he says.
Meanwhile, the firm is taking a conservative stance towards investments for now. 'The only form of leverage we recommend is real estate. We don't advise clients to take on any gearing now. We've had a crazy collapse in confidence and an equally unprecedented policy response. If you put in so much air into a balloon so quickly the repercussions are negative ... It's possible that the market rallies continue for a few months. But after all has been priced in, we could see substantial sell-offs.
'Right now, we stay invested. We're not shorting the market. But the time-frame of investments is reasonably short. And we're careful not to take on gearing, and to ensure that the quality of companies that clients invest in is higher than normal.'
This article was first published in The Business Times.