The rise of the boutique financial advisor poses a threat to many of the world’s largest global private banks. Spooked by financial uncertainty, some high net worth clients are moving money away from the larger players in favour of a more bespoke offering from a smaller firm.

As the world’s third largest wealth manager, with a vast pool of $1.6 trillion of assets under management, Swiss giant UBS could easily lose out from this flux. Instead, Switzerland’s largest bank is turning the rise of the boutique player to its advantage – by growing its financial intermediaries (FIMs) division. And in recent months, net new money growth from its FIMs business has outpaced that of even its signature wealth management services, in some regions, like Europe and Latin America. 

"The growth of FIMs has been considerable over the past five years," Karin Oertli, Zurich-based global head of financial intermediaries, which is part of UBS’ wealth management arm, told this publication. "It is one of the fastest growing areas of the wealth management industry. Certain clients who are wary of what is going on in the financial markets increasingly appreciate advice from a smaller player," she said. "Also in the wake of the global economic crisis, clients want independent advice. As a result, FIMs assets are growing, sometimes at even higher a rate than the AuM of traditional private banks."

FIMs, or third party external asset managers, include multi-family offices, hedge funds, banks, brokers, insurers and independent asset managers. A typical FIM could also be a former private banker with a large institution who has decided to strike out on their own. There are a community of about 3,500 globally, of which UBS services 2,000 through 400 dedicated employees. Swiss banks are the main players in the FIMs market, and Credit Suisse, Julius Baer and Pictet have serviced this area for several years. This is unsurprising, given that two-thirds of the global FIMs community are based in the Alpine region and make up a fifth of the Swiss banking industry, while the rest are scattered across the rest of the world, according to the Boston Consulting Group. And their numbers are on the rise. 

But what can a megalith like UBS offer a tiny fledgling boutique? The answer is, again, typically Swiss. 

“It is all about efficiency,” said Oertli. Oertli was appointed to her current role in March 2009 after more than twelve years at the Swiss bank, in order to oversee the development of the FIMs division. Although the FIMs business has been in existence since the eighties, Oertli's appointment signified a renewed drive for the franchise with a stronger global focus. 

"As FIMs grow, they need access to a smooth and efficient platform which is often too costly or cumbersome for a small player to build or develop themselves, especially when they are entering markets where they don't have a presence yet," she pointed out. She added that whereas in the past FIMs have had one booking location, often Switzerland, as clients become more international they want to leverage UBS' global reach. 

Also, with the rising costs associated with new regulations like the foreign account tax compliance act, double taxation treaties and the UK's retail distribution review, regulation and compliance are pricing many smaller players out of the market. This is where UBS comes in. 

UBS can offer FIMs clients access to its substantial IT platform, custody services, investment products through an open architecture platform, tailored expertise on regulation through external lawyers and accountancy firms, asset pooling services, research and market data, multi-shoring capabilities, e-banking services and advice on mergers and acquisitions. 

Currently, around a tenth of the bank's SFr 750 billion ($818 billion) of global invested assets is invested through FIMs, sources say, which equates to about $89.6 billion. The proportion varies widely from region to region. In onshore Europe it is around a fifth overall; Germany has the highest contribution through FIMs with nearly a quarter of invested assets through third parties. 

Oertli has bold ambitions for the business. "Over the next five years we would like to grow the Asia Pacific FIMs business by two and a half times in terms of AuM, to further cement our position as the clear leader in the FIMs space," she said. If UBS succeeds in its goal it will have a pool of about $225 billion invested FIMs assets by 2017. 

Headway in Asia

Although the number of FIMs is increasing in Asia, the industry is still in its infancy. Of UBS’s 400 employees covering the business, about 25 are based in Asia. The FIMs business constitutes around 3 per cent of the bank's Asia wealth management assets, much less than in Europe. It works with around 200 FIMs in Asia, including FIMs which operate in different booking locations. 

But the bank is also looking to add employees in Asia in a bid to be the main contender when the region's FIMs market expands, which to cater to the swelling wealth in the region, it surely must. According to BCG's Global Wealth Report 2011, the rate of wealth creation in Asia-Pacific excluding Japan stood at 17.1 per cent last year - higher than anywhere else in the world.

To help drive this growth, UBS appointed Reto Marx as its Singapore-based Asia-Pacific FIMs head in August 2010. The Asian business was initially developed out of Singapore, around 2003, and now has added Hong Kong as a second regional hub. 

“This is an area of tremendous potential given the massive wealth creation in the region, where there will be different service providers and business models catering to different clientele and their needs. UBS has the holistic wealth management platform and we want to capture all of these segments,” said Marx, during an interview at the bank’s Hong Kong office.

“In Asia, we are seeing a growth in the number of FIMs in line with the rapid wealth creation in the region where different wealth management services are evolving to meet the diverse needs of Asian private clients,” he added.

He pointed out that in Asia, FIMs are typically either small ($50-200 million) or very big (above $1 billion), with very few in the middle ranges. In Europe, they tend to vary in size across the full spectrum.

Also Asia is, broadly speaking, a younger and less experienced wealth industry. Some FIMs in the region have raised concerns that UBS' vast wealth management business will cannibalise their clients, or clients will want to move straight to UBS. And this has happened in the past. But UBS insists on strict walls between its FIMs business and wealth management unit - they sit in different areas of the bank and are not privy to each other's books. Marx and Oertli believe that the market is big enough to have FIMs and wealth management in co-existence. 

So what can a FIM offer a HNW client that UBS cannot? "Some clients feel more comfortable banking with a smaller establishment with a larger platform behind it," he said. Being smaller and more nimble than the big banks, FIMs can offer various pricing models which can benefit clients. These include an end-client discount, whereby the FIM may request a lower pricing for his client as the FIM itself is charging a management fee from his end, and may not get the retrocession from the large bank. 

UBS has made steps towards establishing itself as the go-to custody provider for Asian FIMs. Last month it hosted its inaugural FIMs networking event in Singapore and Hong Kong, the first of its kind in the region, attended by 30 FIM representatives from Europe and Asia.

“It was extremely useful for the European FIMs to find out more about how to participate in the growth potential of Asia, explore possible collaboration and exchange knowledge,” said Oertli, who flew over from Zurich to oversee the event.

She added that many businesses are interested in setting up operations in Asia, and particularly Singapore due to its strength as a global financial centre, its strong legal framework and availability of asset managers with plenty of expertise. However many did not realise the extent of the work involved, the costs and the difficulties of tapping regional clients as a foreign FIM. "They went back with opened eyes," said Marx.  Oertli and Marx both admit it will take time for the mutually beneficial relationship to take off in Asia as it has in Europe and the US. 

One of the reasons why the market is still underdeveloped in Asia is the different approach to paying for advice. While in Europe, a client may give a mandate to their private bank to manage their assets, in Asia a trading culture is still pervasive amongst HNW individuals. Clients here may feel loathe to pay for what they consider their own work. 

Also the Asian boutique market is much smaller. Fewer senior bankers have branched out to set up their own firm, partly because they get so well paid in-house.

Another main challenge has been the lack of regulatory framework for FIMs in many Asian countries, said Marx, although this will change as the wealth management market in the region matures. And when it does, UBS will be ready for it.