October 2, 2011 4:34 am

Time is right to revert to fee-based model

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Private banks in Asia need to change their charging practices, according to Esther Heer, who heads the Hong Kong operation of Swiss bank BSI.

Banks should turn back the clock and revert to charging asset-based management fees instead of taking transaction-based commissions, says Ms Heer, who is also deputy chief executive for Asia at BSI.

The private banking revenue structure has changed as investment banks and other financial institutions have piled into the industry.

Increasing confidence among investors has also encouraged the shift away from an advice-driven, fee-based relationship to one where investment banks lure clients to their private banking arms by promising a steady flow of investment products. Each trade generates revenue for the bank.

Ms Heer, along with other independent private banks, wants to see private banking return to a model where clients pay management fees for advice on everything from wealth management to estate and succession planning and are offered a diversified investment strategy that may include alternative investments such as property.

And the time is right, with investors feeling bruised and battered by dramatic market swings.

“You hear many bankers say their client is very hands on, that they want to trade every day,” Ms Heer says. “But actually I think Asian clients are sick and tired of losing three-quarters of their fortune when we have a downturn. They’re much more open to a structured [fee-based] investment approach.”

She has convinced about half of her new clients in Hong Kong to go with a fee-based model rather than pay trading commissions. She says only about 10 per cent of BSI’s business elsewhere in Asia is fee-based.

Ms Heer’s client portfolios average 15-25 per cent cash at the moment, a position that is easier to take when revenues do not depend on trading activity, as is the case for commission-based private banks.

But taking a fee-based approach requires the bank to have the investment research support to back it up, something BSI’s parent company, Italian insurer Generali Group, can help with.

“If I can focus with my bankers, from the very beginning, on mandates, I think I’m able to indoctrinate them in a different way,” says Ms Heer, who was one of several senior bankers to join BSI from RBS Coutts in August 2010.

BSI has been building up its team since making its push into Asia starting in 2009. It now has 60 bankers and about 250 staff in Singapore, with 12 bankers and 64 staff in Hong Kong. Ms Heer plans to have 30 bankers working out of the Hong Kong office by next year.

She points out that Asia will not remain untouched in the second dip of a global recession, “but the attitude of the people is still more positive, and more forward looking than for example in Europe”.

“Here we see clients, when there’s a downturn, they say ‘Shoot, another 3 per cent,’ but in the same breath they will ask ‘Do you see an opportunity?’ They are seldom in this total doom and gloom situation.” They are finding those opportunities in gold, high dividend stocks and fixed income, Ms Heer adds.

BSI is certainly not the only European bank looking to Asia for its growth. Wealthy Asians hold $10,800bn in assets, compared to Europe’s $10,200bn, according to the Capgemini and Merrill Lynch World Wealth Report 2011. Asia Pacific assets are growing at 12 per cent annually, against Europe’s 7 per cent.

“In Europe the wealth creation is just not the same,” Ms Heer says. “As long as I have a working career, I will definitely try to stay in Asia.”

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