What Is External Asset Management? Know More!

Investing BY upasana Nov 11, 2023
What Is External Asset Management Know More!

We are here looking at the concept of external asset management to get a better understanding of wealth and asset management. This is a service that would offer the private wealth owners all the benefits that a traditional bank finds hard to compare with. It is a hidden power in Switzerland, is extremely popular in the United States and the United Kingdom, and is experiencing tremendous growth in Singapore and Hong Kong.

In this article, we shall have a detailed look at external asset management, all its elements and capabilities, pricing regulation, business model, and how you can effectively select your external asset manager.

Let me just emphasize the fact that you will possibly find a lot of definitions of this concept throughout the country. However, this article takes the approach from the perspective of private wealth to help private wealth owners explore multiple alternatives to the typical wealth and external asset management offering.

What Is External Asset Management? 

What Is External Asset Management

EAMs or external asset management are those external asset managers who take charge of managing the financial assets or investments of individuals. They do it on behalf of others without having to take in assets under their custody.

If you choose to work with external asset managers, you will still need a custodian. It can either be a bank with a license, that can allow the power of attorney to permit the portfolio management.

Such power of attorney is generally limited and may not allow the asset management managers to withdraw funds.

Independent Asset Management 

External asset managers are financial services providers; however, in most cases, they do not have licenses like banks or any other securities dealer. They work independently outside of the custodian and, hence, are free to offer their clients any solution or product.

As I mentioned before, they do not hold the assets of their clients as the custody remains in the name of the clients.

Right after discretionary asset management, external asset management also offers advice on investment.

They Do Not Have Any Affiliation With Banks

Because external asset management does not have any affiliation with banks, they may offer continuity in their service provision as well as the flexibility to familiarize themselves with the changes in custody requirements.

The customer service they provide is generally comprehensive. They do not follow the restrictions of product lines or standard mandates. They may also offer their own products, which are often collective investment schemes. However, to do this, they need to maintain utmost transparency, avoid any such conflict of interest, and make sure that their products are the best ones in class, which must be acceptable.

The External Asset Management Value Proposition 

In the Swiss External Asset Managers Industry Report of 2017, Credit Suisse highlighted that

“independence and personal relationships with clients are EAMs’ most fundamental unique selling propositions. Independence allows clients to select from a wide range of products and services provided by different custodians.”

The EAM might help the clients choose the best solutions in a less consistent advisory process in comparison to large asset and wealth management companies.

The biggest challenge that EAMs face in their relationship with clients is changing their personal circumstances. To be precise, wealth, which is transferred to the next generation, creates pressure to prove value to the later generations.

External Asset Management: Business Model 

External Asset Management_ Business Model

Whenever you are working with an external asset manager, you would be entering into three contractual relationships. They are namely:

The Contractual Relationships 

The first one is the investment advisory or the asset managing agreement with the external asset manager. Then comes the custody agreement that you need to sign with your custodian. Finally, the external asset manager and your custodian will have to sign a cooperation agreement.

However, the EAM would manage your assets and make investment decisions within the agreed investment strategy. You may still get additional services from your custodian.

Alignment Of Interests 

In its most preferable form, the EAM model aligns its interest in flexible and tailored solutions. Clients get individual services and anticipate continuity without having to depend a lot on the service provider. EAMs also emphasize the relationship with the clients and offer sophisticated services of asset management.

People who need personalized assistance in small and specialized financial intermediary matters would also value entrepreneurial commitment. That EAM makes to share risks with its clients.

In most of the cases, the relationship they share with the custodian is not conclusive for the clients. This is because they will only be holding the external asset management accountable for the consequences.

Partnership Between The Custodian And EAM 

However, the relationship between the custodian and EAM is an important factor in maintaining the quality and satisfaction of the client.

The process of onboarding is one such example of the collaboration between the custodian and the client. It has a substantial effect on the journey of the client. Transmission of data and processing between them is yet another important parameter for this service delivery.

When all the interfaces match equally, this triangular relationship of external asset management delivers the best results ever.

External Asset Management Services 

As per the Swiss Association of Asset Managers,

an industry association of independent asset managers… EAMs maintain a trusted relationship with their clients.”

Here are some of the services that you may receive from external asset management:

  • Comprehensive advice on finance
  • One stop shop
  • Core services like stock market evaluation, assessment of the assets of clients, designing investment strategies, etc.
  • Additional services like collaboration with tax experts, lawyers, and insurance advisors.

External asset management pricing models 

If you are thinking about availing yourself of external asset management, here are the options that they may offer to you:

  • Assets are under management fees, where the pricing will depend on the assets that are under the management.
  • Performance-based compensation allows a greater alignment of interests as the EAM will also have to play its part in the game.
  • Fixed fees are generally the most popular one. Because the clients would not have to suffer due to price fluctuations or any such issues.

The Bottom Line 

When you choose external asset management, there are many factors that you need to consider. These may include the independence of the EAM, performance, transparency, and the quality of its services.

Assessing their collaborating capabilities with the custodians and the other service providers, process efficiency, and price structure is also necessary. If you are looking for high-quality services, make sure there is no conflict of interest.

Continue Reading:

Upasana is a budding journalist who has a keen interest in writing. She considers writing as therapeutic and is most confident when she writes. She is passionate about music, movies and fashion. She writes in a way that connects with the audience in a personal level. She is optimistic, fun loving and opinionated.

View All Post

Leave A Reply

Your email address will not be published. Required fields are marked *

You May Also Like