Lecture 7; Asset, wealth management, research

Question 1

What is the difference between asset and wealth management?

Answer 1

Wealth management
- much more broad focus, advice on how clients to manage wealth
- Advice clients of appropriate investments
- More of a focus on allocation of funds
Asset management:
- Management of assets at fund level
- Services provided to high net worths, and institutional investors

Question 2

What are the fee structures in asset management?

Answer 2

1) Alternative investments: (Hedge funds, private equity, RE):
- Management fee: AUM
- Performance fee: increase in value
2) Equity and convertibles: management fee + sometimes performance fee
3) Bonds & Commodities Management fees: unusual for these to be performance fees
4) Index: Performance fees, typically no performance fee

Question 3

What are the potential COIs between asset and wealth management?

Answer 3

• Wealth managers may encourage clients to invest in products offered by the bank
• This is often driven by compensation structures, which aim to keep client funds within the bank
• Investment fund shoudl be directed externally with other products are better suited to the clients needs and objectives

Question 4

What are the differences between sell-side and buy-side research?

Answer 4

Sell-side:
- Publicly available
- Analysts work for brokerage/ trading departments at IBs
- “Blanket recommendations” are not specific to clients or investment strategies
Buy side research:
- Work for institutional investors, mutual funds and hedge funds
- Identify investment opportunities specifically tailored towards the funds they work for
- May use sell-side research reports for guidance, but tailor their reports specifically for clients

Question 5

How are buy-side and sell-side analysts compensated differently?

Answer 5

Buy side: Compensated based on AUM: their goal is to help clients grow assets
Sell Side: Compensated through soft dollar commissions: where part of the commission from the sales department will be re-directed to the research department: as the department has an intermediary role

Question 6

What are the potential COI between research and other IB divisions?

Answer 6

• IB division has historically placed pressure on analysts to modify negative views of companies that are subject to M&A transaction or financing
• IB department have also asked research department to prioritise reports based on activities of their division - rather than on the firms investing clients requesting objective research
• COI has far reaching repercussions

Soloution: many banks have disposed of their asset management divisions (for example, ML and citigroup during 2005 and 2006)
Banks with both divisions today have also reduced incentive systems designed on keeping funds within banks

Question 7

What happened as a result of the 2003 research settlement provisions?

Answer 7

• Physical separation ‘Chinese walls’ between research & banking professionals
• Firms senior management to determine research department budget without input from IB divisions
• Research analyst compensation cannot be based, directly or indirectly, on IB divisions or activities of the IB department
• Research department cannot partake in IB activities (e.g. roadshows)
• IB cannot have a role on research coverage decisions

Question 8

How is performance measured for most asset classes and hedge funds?

Answer 8

Most asset classes: a well known index or benchmark

Hedge funds: absolute return basis- watermarks that are used

Question 9

Where are the hedge funds houses in IB’s?
What do they do?
How are they different from proprietary trading?
Do IB’s still have hedge funds?

Answer 9

Asset management division
Manage principality for the benefits of investing client
Seperate from propirtary as they allow clients to invest (proprietary only allows company account)
IBs still have hedge funds they manage for clients, but no longer invest themselves