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07.02.2014

Investment banks loss is boutique wealth firms gain: Escala

Pep Perry, chief executive of Escala Partners, fully expects that the boutique wealth management firm he co-founded last year will be joined by other start-ups looking for a slice of Australia's ever-growing investment dollar. And as far as Perry is concerned, all newcomers are welcome.

Perry believes that the reputational damage being inflicted on global investment banks, due to rogue traders, Libor-fixing scandals and the like - coupled with the tougher regulatory environment across multiple jurisdictions - will prompt other advisory teams to leave their large employers and go it alone.

Advisers at Australian wealth practices may be faced with adhering to the Future of Financial Advice (FoFA) reforms, but global banks are subject to similar regulatory changes in many countries.

"Global banks have to comply with FoFA all around the world," says Perry. "There is FoFA everywhere."

Escala was established last year - the first account was opened on May 6 - by a group of former UBS advisers and executives, including Perry, and is chaired by former BlackRock Australia boss Maurice O'Shannassy. Just nine months on, the firm has more than $1 billion of client money under management and was profitable by the fifth month of operation. The clients are mostly of the high-end variety, typically with investable assets of between $5 million and $15 million. The typical management fee is 1 per cent, on a sliding scale.

The observation of an expanding market is timely, coming as boutique fund manager Bennelong Group says it is looking to buy stakes in advisory firms that specialise in wealthy individuals and families.

Counter-intuitively, Perry says he looks forward to other similar firms entering the advice market. In a sector that is highly relationship-driven, the former head of UBS's Melbourne office says competition between boutiques servicing wealthy clients is not an issue. Clients are either long-standing or they come through a referral from a friend or relation, so poaching is unlikely to occur.

The upside, says Perry, is that if a group of five or six similarly minded boutiques could club together, they would have the scale to be able to offer their clients exclusive deals, such as sharemarket floats. He has had one or two discussions with firms who could potentially co-operate, but won't name names.

Perry says he is not surprised by the strong growth of the business because of the confidence that the team - which includes Scott Carmichael, Stephen Collins, Stuart Kay and Ben James - had in being able to attract their clients across to the new firm.

"Our clients had been their advisers for up to 20 years," he says, adding that the firm could be managing up to $3 billion of assets "in the next couple of years".

Like other professional investors, including Future Fund chief investment officer David Neal, Perry says it is difficult to find attractive investments in the current market, although he says the firm would be a buyer of equities, chiefly in developed markets, if markets fell a further 10 per cent. The vast majority of the firm's clients have overseas exposure, mostly through separately managed accounts.

Diversifying clients into offshore markets is a model Perry thinks local wealth managers and stock brokers will need to adopt because of the concentration of the Australian sharemarket and lack of opportunity to invest in companies that make consumer and electronic goods.

"Australian investors are too reliant on the Australian market and franking credits," he says. "Stockbrokers in Australia will have to evolve beyond buying and selling [miners] BHP Billiton and Rio Tinto. It is great investing in Australia, but you are being very myopic and small-minded if you think that all the ideas in the world are being generated out of Australia."

Apart from the interior decor at the firm's offices at the top end of Melbourne's Collins Street - Escala's reception, where clients are free drop in for a cup of coffee and to read the papers, is dominated by a 9-metre custom-designed tan leather Chesterfield couch - another of the firm's distinguishing features is the remuneration structure. Unlike traditional broking firms, remuneration is not linked to the amount of revenue an adviser makes. Instead, employees are paid a straight salary and bonus.

The problem with commission-based pay structures is that they create internal competition, so that employees strive to expand their own business rather than the firm's, says Perry.

"In the short term it is great to have a highly-motivated business, but in the long term it creates a workforce of self-interested people," he says. "The cultural aspects from commissions are destructive to the business."

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“It is great investing in Australia, but you are being very myopic and small-minded if you think that all the ideas in the world are being generated out of Australia.”

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