As Hong Kong strengthens its position as a key wealth management hub in Asia, we have seen the rise of External Asset Management (EAM) arrangements catering to family offices and high net worth individuals.
A tripartite relationship
An EAM arrangement typically involves 3 parties, (1) a family office or high net worth individual (the client), (2) a private bank, and (3) a third party asset manager (Manager).
The client opens an account with the private bank, which provides custody and transaction execution services for the client. At the same time, the client grants discretionary authority to the Manager to manage the assets in the client’s account opened with the private bank and to give trading instructions to the private bank on the client’s behalf. This structure allows for clear segregation of duties, with the Manager handling investment decisions, the bank focusing on custody and execution and the client retaining direct asset ownership and transparency with respect to the portfolio.
The legal documents for EAM arrangements typically include (1) the standard terms and account opening agreement of the private bank, which is signed by the client, (2) a framework agreement between the private bank and the Manager, (3) a power of attorney from the client granting the Manager the authority to give trading instructions to the private bank, and (4) a discretionary investment management agreement (DIMA) between the client and Manager.
Regulatory recognition of EAM arrangements
Both the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority have issued guidance on the regulatory responsibilities of the private bank and the Manager under EAM arrangements. In particular, the guidance sets out conditions that must be satisfied so that the obligation to ensure suitability of transactions for the client rests on the Manager and not on the private bank.
Handling legal issues with care
Each of the parties in an EAM arrangement will face different concerns. It would be wise to ensure documentation and agreements for the EAM arrangement are thoroughly reviewed and considered to protect the relevant party’s interests and to comply with Hong Kong regulatory requirements.
For the Manager, it will need to ensure appropriate legal provisions are provided in the DIMA, in particular in relation to the Manager’s obligation to obtain best execution. The Manager will also need to review the framework agreement carefully to ensure it is able to comply with additional obligations imposed by the private bank. Where the Manager is a Hong Kong licensed investment manager, the SFC expects the Manager to implement robust operational arrangements including internal controls, supervisory oversight and periodic reviews and must execute client orders on the “best available terms”. Investment guidelines and fee arrangements under a DIMA may also be customized and Managers should expect these contractual terms to be negotiated. Depending on whether the client is a “professional investor” and the type of “professional investor” under Hong Kong regulations, different levels of risk disclosures and disclaimers may be mandated.
On the private bank’s side, bespoke legal issues also exist. In particular, the private bank will need to ensure the documents comply with applicable regulatory requirements so that the private bank is not liable for investment suitability (which should be the responsibility of the Manager). The private bank should also consider what exclusions of liability and indemnities may be required to protect itself from any claims arising from the Manager’s actions or advice. When facing the client, the private bank may also need to consider contractual protections against investment losses when following the client’s or the Manager’s execution instructions.
Lastly, for a family office or high net worth investor entering into an EAM arrangement, a clear understanding of the powers and authorities granted to each of the private bank and the Manager is crucial. In addition, investors need to consider the impact of any terms restricting liquidity and withdrawal rights with respect to assets held in the portfolio as well as how fees of the Manager are calculated and paid.
How can Deacons help?
At Deacons, we are experienced in advising Hong Kong licensed investment managers, private banks as well as investors on EAM arrangements and related commercial and investment contracts. We are equipped with the knowledge to help our clients negotiate contractual terms, structure EAM arrangements and navigate compliance complexities. For further information or advice, please reach out to our team to explore how we can best support you.
For further information, please contact:
Scott Carnachan, Deacons
scott.carnachan@deacons.com
