Banks back on their toes

There was a day when service was king among banks and private client

managers. Swiss private banks would do everything from booking

accommodation to walking the dog for wealthy clients.

But performance of assets became much more of a concern during the 1990s. Clients were aware markets around them were

booming. So why were their conservative private banks putting their

money in internally-managed bonds, while they were losing out on a

prolonged equity rally?

Client pressure eventually led to the advent of open architecture in

Europe. This has gathered pace since the turn of the millennium, with

more banks adding the best external managers to their investment menu.

But the feeling among some banks and product manufacturers, fuelled by

recent market falls and fund scandals, is that the pendulum has swung

too far.

The quest for performance at all costs has actually been detrimental to

keeping key clients, many of whom still have service requirements. The

question which banks and investment houses are asking today is: how can

we combine performance and service in order to keep our clients happy?

Back to basics

The market timing and late trading controversies in the US have meant many of the groups involved have had to go back to basics in terms of servicing distributors and clients.

Janus, which manages $150bn (e126bn), was one of the groups most

affected, with CEO Mark Whiston the latest senior figure to make way.

Fund outflows, regulatory investigations and resignations have led to a

renewed focus on client care from the new regime, headed by Eric Gerth,

who runs the group’s $6bn international business.

“We are putting shareholders first and the trust of advisers who put

clients in assets with us is critical. We must make sure that trust is

never again called into question,” says Mr Gerth. “If it affected our

sales, that is something long-term. You will build a robust business

only if you can justify to clients why they use us beyond performance.

You have to make sure that not one single person is affected by service

issues.”

Performance is always critical, says Mr Gerth. It is one of the reasons

why Janus has drawn up several partnerships with providers such as

Intech, Perkins and Vontobel.

Clients, previously restricted to the American group’s aggressive

growth style, which came a cropper during the technology clash, now

have a variety of styles to suit all climates. “Intermediaries will and

should always recommend the best product for the client. But beyond

performance in the rear view mirror is understanding how our product

fits into the portfolio. Providing something inappropriate for the

client can be just as damaging as recommending an underperforming

short-term asset.”

This is why Mr Gerth believes intermediaries such as banks need the

“service approach” which his team tries to achieve through going on the

road and talking to key partners.

Hungry for access

Banca Nationale di Livorno is the main distributor of Janus products in

Italy, with 1100 advisers in their network. In addition to commission,

this hungry group must be fed with educational material and co-branded

brochures, with access to portfolio managers and group meetings.

These banks are what Achim Küssner, head of German sales at Merrill Lynch Asset Management, calls “triple A clients”.

The new thinking at groups such as Janus and Merrill is that in order

to provide the service required, numbers of distributors must be

restricted to a manageable number. “We can structure guaranteed

products in-house for these banks if necessary. We are not just a pure

product provider, but a solution provider,” says Mr Küssner.

Merrill is a key provider for Deutsche Bank’s private and business

clients division, which last year chose eight mutual fund managers,

plus in-house company DWS, to run products for customers.

Through such partnerships, the bank takes the responsibility of dealing

with the final client. But some of this is also shared with the

manager, who provides brochures and regular access to senior

strategists.

While Deutsche Bank’s latest advertising campaign carries the slogan “A

passion to perform”, the reality goes much deeper. Outsiders have seen

Deutsche’s German third party product initiative, currently being

rolled out through branches in Belgium, Italy and Spain, as a sales

push designed to boost the bank’s bottom line, through sharing fees

with asset managers.

‘The trust of advisers who put clients in assets with us is critical.

We must make sure that trust is never again called into question’

Eric Gerth, Janus

‘We can structure guaranteed products in-house for banks

if necessary. We

are not just a pure product provider, but a solution provider’

Achim Küssner, Merrill Lynch

More than a passion

But that is not the case in reality, says Oliver Esslinger, manager of the P&BC division.

“Deutsche Bank is steered not from a product oriented point of view,

but top-down overall asset allocation approach, established for the

customer within the branch,” says Mr Esslinger.

Within each asset class, such as global equity, German bonds or US

dollar bonds, there are four or five different funds available, for

which one is the top buy-recommendation. The research oriented criteria

determines the outperformer in the peer group.

“For our sales people, there is no discrimination between proprietary

and third party funds,” reveals Mr Esslinger. “There is no incentive

for people to prefer one fund over the other. It would be misleading

not only to the Deutsche bank people, but also to our clients if we

were choosing those funds which we make the most money from.

“Our sales force are not just sales people, but qualified advisers.

They have very good support through internet tools. We have an

established global network to communicate with our regions and forces

all over Europe. The feedback we have had is that this is what

differentiates our strategy and open architecture philosophy from

others.”

Private banks, insurance companies and wealth managers are increasingly

stating that it is the structuring of a portfolio in terms of vehicles,

followed by asset allocation, which is just as important as performance.

‘The real starting point is not asset management, but creating the correct legal structure

to manage

the assets’

John Stone, Lombard

International

‘Wealthy individuals are looking for people with whom they can develop a rapport and who they can trust’

John Williamson, EFG

Changing roles

“The role of private bankers has changed from stockpicking to asset allocation, but the

real starting point is not asset management, but creating the correct

legal structure to manage the assets,” believes John Stone, managing

director of Luxembourg-based insurance company Lombard International,

which has developed partnerships with private banks in order to wrap

E4bn of clients’ assets in tax-efficient vehicles. “Tax can be the

biggest negative of all, particularly when passing money from one

generation to the next. Even a 15 per cent investment return can be

totally wiped out by a 40 per cent tax charge, unless you plan for

that.”

This is a theme seized by the old-name private banks, who have

re-styled themselves with a new emphasis on performance, yet are keen

to retain some core values in the elusive performance/service

combination.

“There must be an emphasis on understanding the context in which

clients’ assets are managed,” says Crispin Latymer, private wealth

management director at Cazenove. “This industry is not good at anything

other than looking at managing assets. But tax advice and other

considerations can be crucial in the private client world, certainly at

the top end.

“In terms of hedge funds, the private client is often not told who the

underlying managers are. This makes it very difficult for advisers to

talk through exposure with clients. If these positions are not

revealed, clients can easily double up on managers with different

banks. Often, banks do not know which assets clients hold with other

managers. They just give us a part of the money, but we must try to

understand the overall situation.”

This is one of the reasons Cazenove has integrated the service, or

financial planning side, of the business into the asset management

process.

According to John Williamson, chief executive of EFG Private Bank,

owned by the Greek Latsis shipping family, the most valuable people in

a bank are not the asset managers but the relationship managers. “You

still have to start with relationships and service,” says Mr

Williamson. “Wealthy individuals are looking for people with whom they

can develop a rapport and who they can trust. We need to get the simple

things right first. Then the next step is impartial professional

advice, reflecting understanding of the clients. The third leg is

timing advice, which moves into product solutions and selection of best

managers.”

Occasionally, clients are attracted to EFG through a product. EFG has

been innovative in this area, with substantial assets outsourced to

GAM. But it is much more likely for new arrivals to be referred by

other satisfied clients, believes Mr Williamson.

“Many banks have failed to provide service. Either people pay lip service to personal

contact or they focus on products. But you cannot deliver performance

if you cannot get the basis of a relationship right. The two things

interact very nicely together. You need performance alongside good

service to provide a meaningful proposition.”