Banks offer field day for funds

Investment worlds are converging

Lindsay Tomlinson, vice-chairman, Barclays Global Investors

‘Retail fund buyers are asking for more data’– Tomlinson

Europe is witnessing an important trend related to the convergence of the retail and institutional investment management marketplaces. Schroders is bringing its retail and institutional businesses together, and firms such as Artemis and Standard Life are taking on institutional business on the back of retail investment track records.

Institutional investment managers find retail fees mouth-watering, but there are catches. Upfront fees are retained by the distributor or rebated to the customer. Ten to 20 basis points of the ongoing fee is for administration and distributors require a significant slice to service customers.

This means “retail” fees are maybe only 10 to 20 basis points higher than institutional and the two are converging, as increased transparency has led to customer discounts.

In the pension fund world, all of the assets are available, whereas in the intermediary world, the investment manufacturer often competes with the in-house manager. It will be interesting to see how open architecture settles down, with a current suspicion that in some organisations open architecture is adopted for marketing purposes, but

that 70 to 80 per cent of assets will remain in-house.

Fund buyers for banks and wealth managers are behaving more and more like pension fund consultants, expecting a real insight into the investment process. They are asking for more data, more often, more quickly, in a variety of formats. They need fund managers to be available to meet with them and to support sales activity. They are looking to make valid comparisons between different fund providers, and increasing awareness of the regulation has caused them to buttress decisions with analysis and evidence. This scrutiny is similar to – and in many cases arguably more sophisticated – than the scrutiny placed on investment manufacturers in the institutional world.

Make way for third party offerings

Thomas Balk, president of mutual funds Europe, Fidelity Investments

‘The prospect of sharing customers’ assets with third parties seems worrying initially, but all banks will have to adopt some form of open architecture in the years ahead’

– Balk

Banks are making a clearer distinction between the disciplines of asset management and asset gathering, resulting in a more interactive business model. Product manufacturing and distribution arms of the same firm will often work closer together to identify products that meet the end client’s requirements, typically including third party products as much as in-house offerings.

Pressure to develop new models comes from all four corners of the commercial spectrum. Shareholders are disappointed that in-house asset management businesses have not met expectations. Regulators have warned against emphasising proprietary over third party funds. Customers are demanding access to the best performing funds, and there is pressure from competitors to include their products.

Three distinct forms of open architecture have developed as a result:

• the supermarket approach, which offers the broadest possible choice of funds;

• the guided model, where a bank selects a group of five to 10 partners, typically the best of breed, and makes their offerings available;

• the multi-manager model, where the bank offers an own-brand product for which the underlying investments are managed by a range of managers.

  Open architecture allows banks to adopt multiple solutions, segmenting their client base according to customers and product offerings. A bank needs to evaluate whether proprietary products meet clients’ needs, whether its in-house funds arm will agree to marketing someone else’s funds, how much asset management contributes to the bottom line and how marketing third party funds will impact its brand.

  Many banks combine the three models, risking cost duplication and lacking seamless integration as clients migrate from one to another. A more holistic approach has the benefits of a single platform, encompassing the product range, the selling process and operational infrastructure that supports all three scenarios but is modular enough to be adaptable.

  Today in Europe, 8 per cent of funds distributed through banks and insurance companies are third party. But over the next 10 years that will jump to around 30 per cent, representing a potential opportunity of E2000bn.

  The prospect of sharing customers’ assets with third parties seems worrying initially, but all banks will have to adopt some form of open architecture in the years ahead. The risk of losing customers to other institutions offering greater choice will be too great.

Tough times for in-house products

Mark DeSario, director of managed assets, Merrill Lynch Private Client Group

‘Recommending external funds puts advisers on the same side as the client’

– DeSario

If you practice both funds manufacturing and distribution, once you go to open architecture the house does suffer. In-house advisers will tend to choose external funds. Internal products have to be twice as good because if the fund goes badly, the advisers will have double the explaining to do.

Recommending external funds puts advisers on the same side as the client. But more and more will run to the non-proprietary book when you open up and you need to be prepared for that.

The emphasis will shift to advice. Independence will be key – the compensation paid to our advisers is exactly the same whether they sell internal or external funds.

To be good financial advisers we also need to understand what’s in clients’ portfolios. The ability to manage risk is the most key part of adviser’s job. They need to be supported with models that will show the possible results of what clients are asking for. Are we diversifying clients’ risk or are we actually doubling it up?

When it comes to selecting fund managers, the reason why the same names come up on all platforms is that most fund selectors do not have the research capabilities in place or the operational support to deal with all the different markets. They have to go with big investment houses, who have the operational and sales support. This is bad news because the big institutions are not necessarily the best.

So many funds, so little time

John Gatehouse, head of managed account programme, UBS

‘The importance of impartiality is huge’ – Gatehouse

The origin of the expression “open architecture” started in the US building industry, with the idea of bringing different designers together.

The key to open architecture is the research that goes on behind it. It has to be quantitative as well as qualitative. If you don’t do the quantitative research, you might find a top performing fund, buy it on Monday, and find on Tuesday that the whole asset management team has walked.

There is a huge universe to research – over 30,000 offshore funds. How do you narrow it down? Do you base your choice on the number of golf days you get invited to? Stick to the fund managers you know? The importance of impartiality is huge.

The mix of funds is also crucial. You can’t have a football team of 11 David Beckhams. In a portfolio you need to have funds that pull together and complement each other.

Transparency in costs and revenues is a key issue. It is essential to be clear with clients about what they are getting and what they are paying for. The more assets in the product, the greater the potential.

Advice is the secret to success

David Schofield, institutional sales director, Janus International

‘Open architecture will provide an increasing role for specialist players’ – Schofield

The big powerhouses are the survivors in the fund management market, but open architecture will provide an increasing role for specialist players as customers become more discerning. The banks that have been most successful were those quickest off the mark to focus on advice.

Commitment starts from the top

Jörg Brock, head of investment strategy and product development, private clients, Commerzbank

‘We were not sure in 2001 whether it was the right way to go, but now we are’

– Brock

We started to open up by offering funds of funds in 2001. We were not sure then whether it was the right way to go, but now we are. We have gradually intensified our approach to open architecture, but we still use funds of funds – their lower cost makes them still suitable for some clients.

In order to move towards open architecture, first there must be a commitment from the very top of the organisation. Then an approach must be taken based on performance combined with asset allocation.

The introduction of open architecture does lead to conflict between internal groups and the temporary decline in the flow of assets into internal funds. But there is no risk without opportunity and no opportunity without risk. Within Commerzbank we have reached a stage of understanding. Our fund selection process is transparent, so it has been accepted by our asset management division.

There is now a recognition that more in-house competition leads to more efficiency, better results and more competitive products. Meanwhile, our asset management division is finding new distribution channels. It’s not a fast process, but they will profit from it.

The result of what we did in 2001 was the creation of growth. We switched more assets to higher margin products, which is something that both the bank and the client can benefit from.

Service matters most

Christine Ross, head of financial planning, SG Hambros

‘People above all go to advisers they trust’ – Ross

After the depolarisation of the UK market, now expected in 2005, everybody is going to be able to sell everyone else’s products. The European funds industry is going to benefit from a major opportunity, but only if the groups set themselves up correctly in advance.

There is evidence that more pensions and insurance products will be distributed by independent advisers. But there is also evidence that people above all go to advisers they trust. So I believe it will still come down to relationships.

Wealthy individuals are time poor. We need to give them advice and a complete service so they can go to one institution for all their needs.

Opening up is unsettling

Luca Marighetti, Generalbevollmächtigter, Deutsche Bank

‘You are changing the status quo’ – Marighetti

DWS [Deutsche Bank’s in-house funds company] complained that they could not sell anything through our branches. The moment you introduce the open architecture platform you are changing the status quo. You create a sense of lack of safety in the organisation. It took us two years to build our open platform because we were discussing things internally for so long. It would have been more of an advantage to discuss it internally before implementation rather than during implementation.

Is DWS happy about the open platform at Deutsche Bank? At first, no, they were not. But now they are changing their minds. They see it is the right move for Deutsche Bank strategically to open up.

We are now seeing the overall funds volume increasing. The bottom line is that DWS is getting as much as they were before.

Too patronising an approach

Magnus Spence, managing director, Sector Analysis

‘In surveys, brand tends to be the third most important thing to people selecting funds’ – Spence

Bank distribution outlets say that brand is a very important factor and funds of funds selectors say they are more focussed on performance and process. I actually think they do place a lot of importance on brands but don’t want to admit it. There is a sense that if you do this you are not very numerate or you don’t have an MBA. In surveys, brand tends to be the third most important thing to people selecting funds.

Amongst fund managers there is an unwillingness to ‘waste money’ – as they see it – on brands. This shows an extraordinary lack of understanding of the importance of marketing. In all sorts of ways an investment in brand is a real investment that gives a real return.

The key question about open architecture is: do customers want choice? Funds of funds are a patronising choice. The implication is ‘we will choose for you’. That might be fine for some people, but not everyone.

Names to suit the occasion

Marc Raynaud, head of distribution, BNP Paribas

‘The French network does not currently actively promote third party funds, but it will do soon’ – Raynaud

At BNP Paribas Bank we have one asset management brand – BNP Paribas Asset Management. All the funds we sell to our retail customers are branded BNP.

For private clients we use different brand names – the names of external distributors. The management is the same, but we give the products different names to suit the distributors. They typically want their own brand on the funds and we need to differentiate the funds sold through them because they charge their own fees.

The French network does not currently actively promote third party funds, but it will do soon. They prefer to push smaller numbers of funds to the retail market.

But in Italy, when the appetite for funds increased after the introduction of the euro, lots of banks didn’t have brand recognition so they were glad to distribute products that had brands.

In Spain, the banks did have brands. So when they started to distribute third party funds it was important to distribute under their own name.

Brands help the decision-makers

Matteo Perruccio, chief executive of Pioneer Investments

‘The Internet is the perfect example of why advice is crucial in open architecture’

– Perruccio

There seems to be a supposition that brand is some type of trivial thing. But brand is evidence of a promise kept. You don’t just build brand by advertising in a magazine. You do it by being good at something. Gucci branched out too much and devalued their brand. Now they are coming back to their original proposition. There is a reality to a brand and this why you find the same fund management names popping up. The Internet is the perfect example of why advice is crucial in open architecture. Who loves trying to find something on the Internet? We love Google.com and other things that help us make sense of the choices we have.