Distributors capitalise on kickback culture

In the predominantly captive Italian funds market, distributors still command a very significant share of retrocessions, which can represent up to 90 per cent of Italian banks’ management fees, it emerged at the most recent in the European Fund series of PWM’s afternoon conferences, held in Milan and attended by over 150 delegates from the Italian industry. Results of a study conducted by CRA International for the European Commission of Internal Market and Services, just presented at the Lipper Fitzrovia fees conference in London, make clear that this is something more than just market sentiment. In the boot-shaped peninsula, the cost of fund distribution represents almost 80 per cent of the total expense ratio of a fund. This is the highest percentage in Europe, comparing to less than 50 per cent in France and Belgium (see page five). Highest fee In Italy, the average retrocession paid to distributors as a percentage of management fee is the highest for equity, bond, balanced, money market funds and funds of funds, when compared to France, Germany, UK and Spain, according to new research from ZEW, the Center for European Economic Research. This can represent a key economic constraint, or a lack of incentive for Italian distributors thinking of selling third-party products. Traditionally, in those banks where production and distribution is an integrated process, there is an economic internal conflict, which results in a diversity of economic conditions depending whether the products are manufactured in-house or are third-party, explained Vincenzo Bafunno, chief executive of Unicredit’s open architecture banking subsidiary, Xelion Banca. Giovanni Viani, head of retail and private banking at Sanpaolo IMI, said that it will take some time for this scenario to change. “We [distributors] get a lot of money, too much,” Mr Viani candidly admitted. “But banks have got the same problem as any firm, we have clients to satisfy, an economic account and employees, and we have to make these three things work together.” He added: “We are working towards reducing the cost for many of our products, to make our offering more competitive for clients.” Eugenio Namor, chief executive officer at Sanpaolo IMI Asset Management, which has just recently changed its name to Eurizon Capital, conceded that until recently Sanpaolo was one of the banking groups in Italy giving the highest retrocession to its distribution network, but the creation of Eurizon earlier this year, as the asset management and insurance arm of the group, represents “a pilot attempt to separate manufacturer and distributor.” As a consequence retrocessions have fallen, he said. But when speaking to foreign fund houses operating or looking to enter the Italian market, more probably distributing through established Italian multi-management platforms on a white-label basis, cost of distribution is still seen as a barrier. An authoritative industry representative, Todd Ruppert, president and chief executive officer at T Rowe Price Global Investment Services said to PWM that “the cost of distribution is too high in Italy and that is why I am not doing any business there.” Mr Ruppert explained that he does not see why he should make an exception for the Italian banks, which ask for up to 70 per cent of T Rowe Price’s management fee. This high percentage would erode his company’s standard management fee (40 basis points of total value of assets managed), which is applied to clients all over the world. But Italian independent fund houses complain of the excessive cost of distribution, too. The real drama Attilio Ferrari, chief executive officer at leading fund house Arca, which distributes its products via 120 regional banks said that “the real drama which is burdening our industry is the cost of distribution, while management cost is aligned to international averages.” The solution is seen in the possibility of building multi-management, multi-style products offered by Italian legislation since 2000. “This has given the opportunity to managers to generate additional alpha, and this goes to benefit clients,” said Mr Ferrari. “By adding to in-house skills the expertise of other managers, who employ a different investment style, we can generate more alpha and the client will get immediate advantage.” Arca has enjoyed much success in distributing its multi-manager, multi-strategy funds via its investment partnership with Russell Investment group.

Viani: we as distributors get a lot of money, perhaps too much