or why Independent Wealth Managers continue to blossom Julien Froidevaux, PhD, CFA

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1 or why Independent Wealth Managers continue to blossom Julien Froidevaux, PhD, CFA

2 Today s menu: Introduction Doctoral thesis main characteristics IWM market and business model Survey methodology and results Model methodology and findings Conclusions 2

3 Biography Over 27 years in senior management, investments, and clients related activities, including 15 years covering IWMs Previous employers at MD level include UBS, HSBC, Bank of China, Lombard Odier Darier Hentsch First professional activity as auditor / consultant with Arthur Andersen in 1991 Currently working with Piguet Galland & Cie in Geneva PhD in management (CH); Master in Law, Economics and Management (FR); Bachelor in International Business and Finance (USA) CFA Charterholder; holder of the CWMA designation Swiss CFA Society founding member, past president, treasurer, board member and volunteer Latest publication: Vertus de l indépendance dans la gestion de fortune (March 2018) 3

4 Today s menu: Introduction Doctoral thesis main characteristics IWM market and business model Survey methodology and results Model methodology and findings Conclusions 4

5 Doctoral thesis background and performance definition Background : Doctoral thesis successfully presented in June 2017 at the Geneva University School of Economics and Management (GSEM) Thesis conducted by Prof. Bernard Morard (former Dean of the Geneva Business & Economics Faculty or HEC, today GSEM) Original title : Does the independence of a financial intermediary lead to better performance in asset management and client services? Definition of performance : The meaning of performance is not a direct comparison between portfolios managed by different financial intermediaries as investment briefs differ too widely As a result, performance is defined broadly, with a multi-criteria approach, i.e. which variables bring value added in the context of an independent wealth manager 5

6 Bibliographic review helicopter view 16 dedicated studies Various reports from SROs Market studies (i.e. BCG) CFA Institute publications Selection from Swiss, European, and international regulations FINMA circulars Self-regulating rules and practices 46 laws 19 circulars 24 regulations 6 legal opinions 17 books Bizzozero &Maillard (2014) Bührer (2008) Bretton-Chevalier (2002) Chin (1998) Hair et al. (2014) 68 scientific research articles Research studies on applicable theories, organizational behaviour, company structures, etc. 6

7 Thesis table of contents Introduction Main objective of research Basis of triangular relationship Research framework, organization, and thesis structure Presentation part I Theories and environments applicable to financial intermediaries Presentation part II Type of financial intermediaries, organization, and business model Presentation part III Research methodology and results Final remarks Conclusions Limits of the research/ Futures research Opinions and recommendations Bibliography 7

8 Today s menu: Introduction Doctoral thesis main characteristics IWM market and business model Survey methodology and results Model methodology and findings Conclusions 8

9 Introduction IWM market in Switzerland Market size of financial intermediaries in Switzerland Approx. CHF billion (independent wealth managers only) Number of IWMs in Switzerland Estimated to be between and 6 000, depending on whether regulated players or other trusted advisors are considered Number of managed accounts Average of one account out of seven to one account out of ten usually comes from independent wealth managers, or respectively between 10% and 15% of total assets deposited 9

10 Traditional triangular relationship or agency theory (principal vs. agent) Private client Exercise a discretionary mandate for Opens an account and custodies assets with Has a global relation with Acts a custodian for Has a contractual relation with IWM Executes stock market transactions based on instructions from Custodian bank 10

11 Bank IWM triangular relationship : main elements Delegation by Bank to IWM of several duties Lack of overall responsibility of the custodian bank (portfolio performance) Initial and recurring due diligence Specific (albeit frequent) case former employees Stock market orders execution & responsibility for proper settlement Communication between parties modus operandi IT systems and data flows End of relationship Scenarios 11

12 Business model - direct and indirect potential remuneration Direct remuneration Portfolio management Proprietary funds Various performance fees Related services (family office, fiducie, etc.) Products / funds distribution Others Indirect remuneration Retrocessions (on custody, transactions, etc.) Introducer fee Margin sharing (forex, lending, others) Soft dollars Others 12

13 Today s menu: Introduction Doctoral thesis main characteristics IWM market and business model Survey methodology and results Model methodology and findings Conclusions 13

14 Survey design and sample criteria Survey design Sample criteria / questions (e.g. Asset Management axis) Software selection Preparation of questions Pre test Select relevant population Validate source of data Determine scales and measuring techniques Data gathering Analysis Financial instruments used for portfolio management Clients investment profiles Asset management style Incentives of asset managers Use of public investment funds Creation of dedicated proprietary funds Performance comparison (public vs. private funds) 14

15 AUM composition : 2000 vs potential for growth % % % % % % % % 5. 00% 0. 00% AUM < > 1000 Stability of existing clients 27% Erosion of existing clients 7% % % Growth from new clients / managers 66% % % % 5. 00% 0. 00% AUM < >

16 Custodian banks avg. number and services ranked % % % % N ot i m por t ant at a l N ot i m por t ant I m por t ant V er y i m por t ant Ex tr em el y im po rt ant 0. 00% 1 bank onl y 2-3 bank s 4-5 bank s 6-10 bank s > 10 bank s N etw or ki ng and ext er nal e vent s A ccess t o ot her b ooki ng cent er s Pr od ucts and f unds of f er in g A ccess t o addi t io nal ser vi ces O ver al l f lex ibi l it y Q ual it y of cl i ent r epo rt i ng to ols I T syst em Q ual it y of ex ecut io n Fees Q ual it y dedi cat ed IA M t eam R elat i on wi t h fi nal cli ent R eput ati on 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100 % 16

17 Dedicated funds presence and use % % % % % % % % 0. 00% Yes No % % % % % 0. 00% Le s t han 10% B etw een 10 and 25% B etw een 25 and 50% O ver 5 0% 17

18 Performance criteria ranking N ot i m por t ant at a l N ot i m por t ant I m por t ant V er y i m por t ant Ex tr em el y im po rt ant R ati ngs Si ze por t fo li o Fees G over nanc e pr oac ti vi ty R isk m gm t A sset m anager educat i on D éte nti on par t s p ar gér ant Ti m i ng (i nv estm ent ) R ebal anci ng fr equ ency Po rt f ol io di ver si fi cat i on Sh are sel ect ion H edgi ng A sset al lo cati on pol i cy Per si stan ce asset m anagem ent st yl e Fl ow of f und s Macr oeco nom i c f act or s Past per fo rm an ce 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100 % 18

19 Proxies performance criteria 100 % N ot i m por t ant at a l N ot i m por t ant I m por t ant V er y i m por t ant Ex tr em el y im po rt ant 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Per f or m ance vs. i ndi ce Per f or m ance vs. co mp eti t io n Per f or m ance vs. b anks A vai lab le pub li c fu nd r ange Ex ter nal use of pr opr i et ary f unds Pr esence of pub li c sit es Par t i cipa ti ons «bea uty cont est s» R ecept io n o f «aw ar ds» 19

20 Today s menu: Introduction Doctoral thesis main characteristics IWM market and business model Survey methodology and results Model methodology and findings Conclusions 20

21 Practical purpose of a model I. Assess impact of internal decisions II. Better allocate internal resources III. Foresee impact of new factors IV. Forecast strategic changes 21

22 Model main features : PLS - SEM Structural Equation Modeling (SEM) is a statistical multivariate technique for testing and estimating causal relationships, using a combination of statistical data and qualitative causal assumptions The technique combines multiple regression and factor analysis in order to predict a series of dependent variables from a very large dataset of independent variables The model is used to explain the relationship between indicators with the corresponding selected axis (external model) and between the relevant axes (internal model) Through a dedicated software (Smart-PLS), an iterative approach is used to test all possibilities of combining axes and variables through multiple regressions (MR) Principal Component Analysis (PCA) is used to reduce the number of variables and identify key axes as well as variables best attributed to each axis 22

23 Three steps to establish a relevant PLS-SEM model 1. Determine the structural / inner model through linear equations (relations between latent variables) Ind 1 Ind 2 1 st axis Ind 4 Ind 3 Ind 5 2. Assess the measuring / outer model through regressions (relations between observed data and latent variables) Ind 6 3 rd axis Ind 7 Ind 8 3. Confirm the direction model (the scheme which displays causality direction and weights / relationships amongst variables) Ind 9 2 nd axis Ind 7 Ind 10 Ind 8 23

24 Key axes and variables Table -1 Model V - Variance and cumulated variance Initial Eigenvalues Extraction Sums of Squared Loadings Component Total % of Variance Cumulative % Total % of Variance Cumulative % E E E E Extraction Method: Principal Component Analysis. Component Matrix a Component Presence and proportion of dedicated funds Education and training of asset manager Quality of shares selection Retrocessions from custodian banks AUM Independence vs. custodian banks Ability to solve problems Execution of transactions Access to IT systems Portfolio performance Reputation Extraction Method: Principal Component Analysis. a. 7 components extracted. Reduction of number of variables and explanatory power of the model : Total number of variables reduced from 146 to 41 through Principal Component Analysis (PCA) Cumulated variance of the first 7 variables (axes) stands above % Explanatory power of the model hence above 83% The most stable model corresponds to the optimal organisation of the company 24

25 Path modeling axes retained and direction model 25

26 Overall model all selected axes and variables 26

27 Today s menu: Introduction Doctoral thesis main characteristics IWM market and business model Survey methodology and results Model methodology and findings Conclusions 27

28 Overall findings Enormous diversity and lack of homogeneity in the market of financial intermediaries - in particular within independent wealth managers Average size of companies amounts to 3-5 individuals, but the market also displays several structures with more than 50 people, some collaborating with each others Pure asset managers with strong investment convictions work side by side with more traditional client driven relationship managers (IAMs vs. IWMs) Platforms - with dozens of managers without a common culture and centralized asset management - evolve in parallel with family-like structures that have been active for several decades 28

29 Notion of independence Independence is difficult to define as it is subject to several interpretations It s importance is not called into question when it comes to : Number of depository banks used Method of remunerations and duty of transparency (for retrocessions in particular) Asset management style and purpose via dedicated / proprietary products Number and importance of clients Company structure and resources are closed linked to independence factors 29

30 Impact of external factors Evolution of regulation => greater transparency + higher administrative burdens A (most likely) irreversible change: end of banking secrecy Sharp decline in margins + increased responsibilities Arrival of new and highly skilled players Consolidation of the industry announced for the past 20 years has not happened Material and positive evolution of the profession IWM business turning 30 in the Swiss financial market = a clear sign of vitality! 30

31 8 propositions for an hypothetical ABCD Co. to strive 1. Maintain considerable agility and flexibility vs. the largest players in the market 2. Occupy sectors and markets less covered by large institutions 3. Avoid standardization - find real added value based on a unique competence 4. Maintain substance and financial stability of the company 5. Guarantee a real, demonstrable, observable, and lasting independence 6. Maintain perfect reputation & continuing education beyond future requirements 7. Invest in quality time with clients 8. Keep the human being at the centre of the relationship 31

32 Limits of research Propositions post research Use of survey data as variables Survey Model Not an homogeneous market Lack of comparable performance data Not much global research on this topic Uniqueness of Swiss environment Simplification of questionnaire Regular renewal (e.g. every three years) Expand geographical coverage to other Swiss / European regions Use other intermediaries for further proxy evaluations Update with new data Optimise for updated simulation Adapt to various type of intermediaries Use actively to refine strategy with relevant variables 32

33 Future research (selection of topics) Financial markets Impact of new regulations : real impact of FIDLEG, MIFID I,I PRIIPS, etc. Business model Retrocessions : until when? How transparent? Unfair management? Role of custodian bank Clueless on performance (or just pretending?) Independence criteria How to truly measure independence? Continuing education SROs vs. industry standards vs. SAQ vs.? Asset management and performance Performance of non public funds and instruments relevant comparison Clients How really satisfied are they? 33

34 Book available via: Internet site Slatkine ( or type Slatkine Froidevaux on search engine) Payot, FNAC, Payot 17 septembre 2018 BTC USD «Survivre au futur» Payot May BTC USD «J achète du bitcoin» Payot July BTC USD «La tragédie de la croissance» Julien Froidevaux Vertus de l indépendance

35 A perfect triangular relationship 44% Merlot 11% Petite Syrah 42% Cabernet Sauvignon & 3% Petit Verdot 35

36 Julien Froidevaux Vertus de l indépendance