Singapore aims to become a family office centre on the international scene. The Business Families Institute at Singapore Management University's T. Mandy Tham, Esther Kong, and Juliana Koh investigate the growth of external asset managers as a new wealth management option among high-net-worth people and families.
The EAM business model
The EAM revenue model
Growth factors for EAMS in Singapore
Opportunities for Singapore's EAM sector
The emerging EAM ecosystem
Over the last two to three decades, personal wealth has grown enormously across the Asia Pacific area. Singapore has been a natural beneficiary of this expansion due to its strong reputation as a financial centre, political stability, and pro-business laws. An ecosystem is quickly developing to facilitate the expansion of family offices on the island as the nation shifts to the next phase of wealth management centred on the ultra-rich. Singapore has set its sights on being a centre for family offices on a worldwide scale and is quickly establishing its reputation in this regard. The external asset management (EAM) sector in this country has grown symbiotically as a result of this tendency.
In light of this, the Business Families Institute at Singapore Management University (BFI@SMU) carried out research that is distinctive in that it focuses on the perceived growth determinants, difficulties, and prospects for the EAM industry in Singapore. In January 2022, it released the study report, which used a survey approach. Between March and July 2021, the survey was launched online and received a total of 41 replies. Senior executives to managers were among the survey participants. They primarily represented family offices, money management companies, and EAMs. Researchers then conducted confidential one-on-one interviews with members of the Association of Independent Wealth Managers (AIWM), EAM officials, and industry veterans overseeing the financial intermediaries at major custodian banks in Singapore to supplement and validate the poll results. Inputs from case studies that have been written on the EAM company are included in this article together with selected important findings from the study report.
In contrast to the conventional private wealth management paradigm, the EAM company is based on a novel business model. The internal investment experts of the bank would typically manage the account when a high-net-worth client opened one with them. The EAM approach, on the other hand, has the bank handle account servicing while a third party handles the investments. The EAM gives guidance to the custodian bank where the customer establishes the account as well as investment advising, discretionary portfolio management, tax, and succession planning services. A limited power of attorney (LPOA) over the account is subsequently granted by the client to the EAM, who is then given the authority to handle the assets with the custodian bank. Thus, the model establishes a triangular partnership between the customer, the custodian bank, and the EAM.
Retrocession, management, and performance fees are how EAMs make money. Retrocession fees are commissions the EAM receives from the bank in exchange for directing its clients to that bank. They are the simplest to produce. Based on the number of trades conducted for the clients, custodian banks also provide EAMs with a refund on a percentage of their service costs. Some regulatory bodies mandate that EAMs advise their clients of the retrocessions, while others may leave it up to the EAM to do so. To lower the net fees paid by the customer, EAMs may choose to pass along a portion of their retrocessions.
EAMs that manage client portfolios may be charged management fees. Based on a discretionary mandate, this is demanded yearly. The client pays the third income stream, the performance fee, depending on the pre-established performance criteria with the EAM. An EAM can utilise all three revenue models at once.
Growth factors for EAMS in Singapore
The value proposition supplied by the EAM, the value proposition Singapore offers to the business, and assistance from regulatory and governmental agencies are the three key sources of the industry's projected growth drivers over the next five years, according to its poll on EAMs in Singapore.
The main benefit that EAMs provide is a dedicated effort to forge enduring bonds with high-net-worth clientele. EAMs can provide long-term client-focused investment and wealth advising solutions because they are not subject to short-term revenue objectives or the pressure of selling in-house products. They gain long-lasting customer relationships because of the impartial and expert investment advice they provide.
The second value proposition results from clients gradually adopting the EAM methodology. Clients grow more aware of and trust EAMs as the industry develops, making them more willing to award an LPOA to an EAM. The EAM sector is still making efforts to raise awareness.
The capacity of the EAM to offer customised solutions to meet customer demands constitutes the third value proposition. EAMs can serve as prime brokers and provide customers with open architecture because they are independent advisers. As a result, they have access to a variety of capital markets, investment products, and solutions provided by their panel of partner banks via working with several custodian banks. Due to the open architecture of the EAM company, the gains are derived from the EAM's provision of customised investment management services for customers.
Singapore is renowned for being a leading centre for finance and fintech. The island is home to renowned local banks as well as major international institutions. Global asset firms with physical locations in the city include BlackRock, Nomura, and Franklin Templeton. Due to the abundance of financial institutions in Singapore, investors may find a depth and breadth of investing, banking, and wealth management products. Singapore, a fintech hotspot, also provides high-net-worth individuals private investment options in the start-up industry.
The development of Singapore as a centre for family offices is another significant value proposition. A family office is a particular private business established to oversee the fortune of an extremely wealthy family. Family offices often want a variety of investment options, as well as flexibility and value-add in their partner decision. The EAMs offer a substitute for private banks, and more than 80% of the respondents thought they added value to family offices through excellent client relationship management and engagement. In addition, 56% of respondents emphasised their knowledge of how to provide advice on intergenerational succession planning.
The Singaporean government has worked diligently to turn Singapore into a respectable family office centre. The majority of those who responded to our survey were aware of the support provided by the Singaporean government for EAMs to build their digital wealth management skills, including grants, regulatory compliance, support for digital platform expertise, and grants. The Monetary Authority of Singapore (MAS) and Association of International Wealth Management (AIWM), a self-regulatory group that represents around 70 members of the EAM ecosystem, often engage in communication concerning the requirements of the EAM industry.
To encourage the establishment of family offices, which would fuel the mutually beneficial growth of the EAM industry, Singapore has also approved legislation regarding the Variable Capital Company (VCC) structure. The VCC, which was introduced on January 15, 2020, is a new corporate entity form that enables the consolidation of many collective investment schemes under the control of a single corporate organisation. The VCC framework enables family offices for their fund management operational freedom, tax exemption, and cost savings. The VCC structure, for example, can be used for open-ended or close-ended funds as well as a variety of investment strategies that vary from conventional to unconventional asset classes, such as private equity. Additionally, it permits the payment of dividends to investors from earnings and capital.
There is a taxable presence for a fund in Singapore when a person administers it at their discretion. However, funds managed by licensed fund managers domiciled in Singapore will enjoy income tax exemption, which also applies to VCC funds, under sections 13R and 13X of the Singapore Income Tax Act. The law supports the need for EAMs by requiring the VCC to manage its assets through a Singapore-based licensed fund manager, such as an EAM. More than 260 VCC funds have been established since the VCC law was introduced.
Opportunities for Singapore's EAM sector
Despite the difficulties, the EAMs have many chances. By switching to an open architecture, the majority of our respondents are strengthening their competitive edge. In the next five years, basic competency criteria for EAM personnel will likely be implemented, and an ecosystem and alliance network for EAM will be created to provide clients with value-added services, according to 41% of respondents.
What might an environment that promotes EAM sector trust look like? We predict that the EAM industry will develop into a three-pillar ecosystem based on poll results. EAMs' revenue-generating goods and services are complemented by stakeholders in the first pillar, including working groups with the MAS, family office networks, private banks, and tax specialists. The parties involved in this pillar collaborate to raise EAMs' profitability. For instance, working groups that represent the EAMs will speak with the MAS about the need for regulatory compliance and ask for its assistance in managing such expenditures. The EAMs will be engaged by the family office networks as investment partners, resulting in revenue growth for the EAMs. As custodian banks, private banks will assist the EAMs.
A broad network of professionals and academic institutions that supports research, education, and thought leadership makes up the second pillar. As an illustration, the AIWM gives general information to EAMs, self-polices its members, and supports a minimal reputational standard for the EAM industry. Prospective customers become aware of the EAM business model as a result, giving them a networking opportunity. Universities may assist EAMs with their learning and development needs since they are specialists in training and talent development. The second pillar is important for charting the longer-term non-financial components of the industry, such as building the sector's image and guaranteeing a talent pipeline, even if it does not immediately increase the financial earnings of EAMs.
The current network, which includes corporate banks, fintech associations, and investment banks, will comprise the third pillar. These institutions are still crucial to the expansion of the EAM industry. For instance, fintech groups will keep assisting EAMs with their use of technology and path toward digital transformation. For corporate finance solutions desired by customers, such as the issuing of bonds or equity for the clients' running enterprises, the EAMs will keep using investment banks. Similarly, corporate banks will continue to assist EAMs by giving their end-clients corporate banking products including cash management and trade finance for their running businesses.
The basic contribution of each pillar to the EAM ecosystem would continue, but we believe that as the EAM sector develops, the specific actors in each pillar would vary over time.
To summarise, we discussed growth reasons and difficulties for the EAM industry in Singapore, as well as the EAM business and revenue model in this post. If we had to sum up our results and the prognosis of the EAM industry in one word, it would be "optimism." Participants in our study eventually anticipate that Singapore's EAM market will expand rapidly.
