Why work with an external asset manager (EAM)?

The short answer is: Because Bankers respond to the Bank. External Asset Managers respond to the client.

However, the topic is a bit more complex than that, so let’s dig more into the differences between Family Offices (FO), External Asset Managers (EAMs) and Bankers.

What is an External Asset Manager (EAM)?

While everybody can imagine what a Bank is and what a Banker does, not everybody knows what an external asset manager (EAM) is and how they work. This is a new sector in the financial advisory business that has been growing steadily in the last 30 years and now it’s reaching a point of high growth.

An External Asset Manager (EAM), also called Family Office (FO), Registered Investment Advisor (RIA) or Financial Intermediary (FIM), is a wealth management firm usually founded by ex-senior Bankers that used to work at a Private Bank. EAMs are called as well “external asset managers” because they manage the assets of their clients at the Bank but they are not employed by the Bank, they are “external” but have access to the Bank account just like if they were internal or employed. EAMs usually work with various Banks.

There are Single Family Office (SFO), that take care of the wealth management and all financial needs of a single family (usually an Ultra High Networth family). And there are Multi Family Offices (MFO) that advise various families of high net worth individuals.

The difference between a Family Office (FO) and an External Asset Manager (EAM) is that FOs are a subcategory of EAMs. FOs are usually larger than a typical EAM, meaning that they usually manage more assets, they have more employees/specialists than a EAM and they don’t offer exclusively portfolio management services but they also help their clients with concierge and lifestyle services, wealth planning, asset consolidation, insurances, bookkeeping, and other financial services. The term Family Office is wide spread in the USA, Europe and Asia.

Facts and Figures about EAMs in Switzerland

Let’s have a look at some interesting facts and figures about External Asset Managers (EAMs) in Switzerland:

• As of 2021, there are more than 2,000 EAMs in Switzerland that manage USD 500 Billion assets under management.
• EAMs manage 1/6 of all assets managed in Switzerland.
• 50% of EAM firms manage less than USD 100 Mio Assets under Management and 70% manage less than USD 250 Mio Assets under Management.
• 30% of EAMS have less than 20 relevant client relationships and 43% manage between 20 and 99 clients.
• 90% of EAMs have less than 10 employees.
• A typical EAM works with 3-4 Banks.
• EAMs are a highly growing sector in the Swiss financial industry. The number of EAMS has doubled in the last 4 years, passing from 1,000 in 2017 to over 2,000 in 2021.

Source: https://www.finews.ch/news/finanzplatz/46404-unabhaengige-vermoegensverwalter-finanzplatz-schweiz-banken-assets and https://de.statista.com/statistik/daten/studie/751688/umfrage/unabhaengige-vermoegensverwalter-in-der-schweiz/

How do External Asset Managers (EAMs) work?

EAMs usually get a limited power of attorney (LPOA) from the client. This power enables them to open an account in the name of the client with the Bank or take over the management of an existing banking account, place investment orders, request loans, make wire transfers and close the account. However, EAMs can also work with an advisory agreement without having to receive a LPOA from the client.

Retrocession-free models

EAMs don’t have a fixed pay, they earn from what they produce managing the assets of their clients. EAMs charge a fixed percentage fee on the assets under the management of the client. This is what makes EAMs tick different than Bankers. If the portfolio of the client grows, the EAM earns more. In contrast, if the performance is poor and the portfolio value decreases, the EAM earns less. Also, if a client leaves, the EAM will feel it immediately because there will be less management fees/revenues generated. In opposite, if the EAM acquires a new client the revenue generated will increase immediately. For this model to be competitive with Banks the EAMs negotiate lower trading and custody fees for their clients so that there is space for them to charge a management fee on top of Bank fees. Therefore, a EAM is on the same side as the client, has aligned interests and has no conflict of interests. The EAM is not a salesperson but an independent advisor. This is the big difference between Bankers and EAMs.

Retrocession-based models

However, this is valid only for EAMs that don’t work with retrocessions from Banks, meaning that they don’t accept any payments from Banks, Fund or any other financial provider and the only revenue stream are the fees from the clients. A certain number of EAMs still works with a retrocession-based model. That means, that the EAM doesn’t charge any fees to the clients directly but receives part of the revenues generated by the Bank. The service of the EAM is “for free” for the client. This model can appear to be financially very attractive for clients however the EAM that works with this model “ticks” similar to a Banker because in order to earn more the EAM has the incentive to “sell” funds and structured products where the retrocession is higher than when investing in a regular stock or bond. Also, executions are often done with a broker that pays retrocessions to EAMs on top of every trade done, meaning that the client will often pay a higher price for all traded securities. However, the EAM remains client-driven, meaning that if the portfolio grows, the EAM earns more custody fees and if the client leaves, the EAM will immediately earn less, therefore the client focus remains however with a certain conflict of interest in the place.

How do Bankers tick

Client-facing employees like Bankers and assistants are the responsible people within the Bank to make sure the clients sign all required documents, fulfill all legal “anti-money laundering” (AML), “Cross Border” (CRS) and other rules and have their “Know your client” (KYC) files up to date. At the same time, Bankers are responsible for the performance of the portfolios. And most important for clients: Bankers must make sure the clients are happy, and the relationship is open and genuine.

Bankers are faced with a huge conflict of interest. On one hand, their employer expects them to fulfill all legal and compliance requirements while generating the most revenues possible for the Bank and acquiring new customers every year. On the other hand, the clients expect the Banker to deliver a good investment performance, not bother them with too much administrative and bureaucratic stuff and be honest and always available. While Bankers try to make their employers and their clients happy, it is obvious who they will prioritize, namely the one that pays their monthly checks: The Bank.

In Switzerland, Bankers get a fixed salary payment and a bonus once a year. The fixed pay won’t change if a Banker loses/wins clients or if the performance of the investments is poor/good. The bonus can vary but it must be a very bad or very good year for the Banker for the bonus to change significantly. The bonus usually moves in a range of +/- 10% every year and it depends more on high-level factors like if it was a good year for the Bank or for the department. Therefore, the Banker doesn’t really have high financial incentives to offer a good service or top-performing investments. The only way a Banker can increase his/her salary or bonus is to be promoted internally and get a higher job title or become the team head. That’s why career-focused Banker that strive to earn more money focus on having a good relationship with their bosses and the atmosphere becomes more political and less meritocratic.

Banks have been subject to a lot of regulatory changes in the last decade. They have been loaded with tons of administrative work and new responsibilities. This work has been delegated mainly to client-facing employees. This has caused that Bankers spend most of their time with administrative and compliance work while neglecting their client’s needs.

On the other hand, Bankers need to generate profits for their employers. Banks have developed a huge product-offering machine that supports Bankers on their mission. There are regular sales meetings where new products are launched and structured. Every new product generates high subscription fees for the bank, much higher than when a client purchases a regular stock or bond. This has unfolded the imagination of Banks converting them into investment ideas generating think tanks. Banks sell stories. After selling the products the Bankers don’t care too much about the performance because one they simply don’t have the time and the resources to track it and second because the business is on the sales side, not on tracking the performance. What is also very common practice is the distribution business with Mutual Funds. Banks offer nowadays exclusively Funds to their clients, with which they have retrocession agreements, meaning that for every investment in the fund referred by the Bank, the Bank receives a recurring kickback or a payment from the Fund. On the one hand, this is good for the clients because the funds have gone through an approval process. This process makes sure the fund is not a scam or a fraud. However, history has shown that this process is not always as secure as it should be, but we will talk about this point later. But on the other hand, Banks don’t always offer the best Funds to their clients but only the ones, that they have an agreement with. This is a clear conflict of interest of the Banks towards their clients and converts the Bankers to sales persons (not advisors).

It is important to note that the Banks are still the institutions that manage the largest chunk of the financial assets. They manage more than 80% of the clients and with that the infrastructure and the money. Every Private Banker manages an important number of clients and volume of assets. Depending on the Bank it can be between on between USD 200 and USD 400 Million per Banker with over 100 clients each. That makes the administrative work so heavy loaded for Bankers.

The first thought of a Banker when he/she goes to the office is how many pending compliance  cases they will have, and which are the most urgent ones. Why? Because compliance rules the Banking business nowadays. Sometimes administrative work is so much (covering up to 80% of a Banker’s daytime) that they don’t even have time to see what is happening in the market or to talk to clients. The second thought of the typical Banker is how far he/she is with the sales targets. That will incentivize to sell any kind of products “dictated” by management to make the boss happy. The bank motivates their Bankers by publishing a list of sales so that all Bankers see who the best (and worst) salespeople in the department are. Even more frustrating for Senior Bankers is the fact that Banks are delegating the investment advice job to a specialized “investment advisor” or to the “discretionary mandates desk”. That means that the remaining job is administration and talking with the client about mainly administrative issues or calling back the client to execute payment orders.

How do EAMs tick

Now that we have seen how a typical EAM looks like and how they work, we can better understand how EAMs tick. The typical EAM manages a third of the assets that a typical banker manages and has less clients than a Banker. This gives them more time for each client. Additionally, EAMs have no pressure to push any type of product. Both the Banker and the EAM have pressure from compliance to meet anti-money laundering, KYC and all other legal requirements, however, since the EAM has less clients, the administrative burden is respectively lower. In addition to that, an EAM doesn’t have to create tables and reports for management, which takes away a huge part of the time of Bankers.

A typical EAM is more worried about how to acquire new clients, avoid bad investments, increase the performance of portfolios (always adhering to the investment strategy and risk profile of the client) and avoid losing clients. These points will define every day of the EAM. For an EAM there is in theory no barrier on how much he/she can earn compared to a fixed salary of a Banker. The larger the managed portfolio is, the more revenues are generated. This is the big driver of EAMs. A big advantage that EAMs have is that they work with various banks together. That means that if an existing client has 3 Banks, the EAM can take over the management of all banks quickly. That way they avoid having to open a new banking account which can take up to several weeks.

The short answer of why clients should work with an independent financial advisor/EAM/RIA/FO is to get the best world of both Banks and independent Advice.