Merrill gaining more from fewer relationships

Talk about open architecture to James Charrington, head of non-US retail business at Merrill Lynch Investment Managers, and he will shake his head dismissively and fix his gaze out of the window towards the Thames, flowing smoothly along past his London headquarters.

“The view that we held after the market collapse in 2002 was that open architecture was just a fad, due to managers wanting to push their products onto distribution platforms,” contends Mr Charrington, whose responsibilities span Europe, the Middle East and Africa. “What it really should be about is giving clients the best products and solutions.”

When Merrill addressed the issue at the beginning of the decade, its strategists were faced with a variety of possible distribution models in their search for the most effective approach to the European market.

“To create the optimum distribution force, we had to ask ‘does structure or strategy come first?’,” says Mr Charrington, an unusual 12-year Merrill veteran in an industry where there is little long-term loyalty to employers or clients. “The answer is neither; the client comes first. Through our difficult years, we had to think who our clients actually were.”

Legal problems

One reason for this was that their nature was changing quickly. MLIM lost key institutional clients following high-profile legal action from Anglo-Dutch group Unilever, which led to a £75m (e109m) out-of-court settlement in 2000. UK business from independent financial advisers (IFAs) also lost prominence, while the firm began to diversify European third-party channels through banks and distribution platforms.

The UK performance problems, combined with severe staff cuts and potential US conflicts of interest between Wall Street banks and their investment management subsidiaries, led to strong indications that the $500bn (e382bn) MLIM operation would be put up for sale. These have been played down, but not denied by Mr Charrington, who would only say that “asset management is definitely an integral proposition to clients”.

MLIM’s profitability has been more impressive than other parts of the Merrill group, with increasing European third-party business helping compensate for collapsing UK institutional market share. “In bear market years, margins have been under pressure,” says Mr Charrington. “But MLIM has been a profitable organisation through the whole period. Profitability and a strong balance sheet have been very important when institutions are buying into third-party distribution. Distributors want to feel there is integrity and strength in their manufacturer.”

This is particularly true for Merrill, which does not have captive retail distribution in Europe, and therefore must rely on third parties for new business.

“The route in Europe is very different to the US, where we have a whole army of salesmen who want ownership of the client,” says Mr Charrington. “Here, we don’t have the infrastructure to support a true retail distribution capability, and we are never going to have one.”

MLIM’s European business model includes a particular push on the private client side, through small numbers of partnerships with ‘Triple-A’ distributors, while also trying to get funds on platforms to hit retail customers.

The move to reduce numbers of relationships with distributors, and concentrate on the handful likely to generate significant fund flows has been highly successful, according to Mr Charrington. “Right across Europe, in the first quarter of last year, we did more business than in the first quarter of 2000, in fundamentally inferior market conditions with fewer clients,” he says. “The number of distributors we use is continuing to fall.”

Guided efforts

Merrill is concentrating its efforts on outlets which have moved to ‘guided architecture’. “Clients want third party funds, and now they can take their pick of 3000 from 100 managers,” smiles Mr Charrington. “But that is not particularly attractive to the retail investor, who is left with three times as many funds as previously. There is no certainty for the distributor as to what will end up in his offering. And service must be paid for, so the distributor needs to be comfortable with how much volume he can deliver.”

These trends have quickened the move from open to managed architecture, says Mr Charrington, with banks needing to provide specific solutions for clients, where these are unavailable internally. He talks about targeting distributors selecting eight to 10 preferred providers, with an emphasis on performance and big brands.

“The retail market is becoming far more institutionalised in its process,” says Mr Charrington. “In the early days of open architecture, the situation was reluctantly accepted by distributors. But today our products are getting endorsements and recommendations from distributors they were not getting before. The product can no longer get from here to the client without an institutionalised selection process.”

These selections are driven by numbers and quality of engineering, and the need to understand how the numbers are produced, believes Mr Charrington. “But it is important not to compete for distribution with your partners. Our brand does not overwhelm institutions such as UBS or Deutsche Bank.”

The latter is clearly Merrill’s trophy client. And any competition has been eliminated now that Merrill has sold off its private client operations in Deutsche’s German homeground.

MLIM used the bear market of 2001-2 to re-engineer its fund products – merging three Luxembourg fund ranges into a single 30-fund offering – and create its ‘Platinum Account’ programme, giving a senior director responsibility for each key distributor relationship.

Chief operating officer Rob Fairbairn is in charge of the partnership with Deutsche Bank, with Frankfurt-based regional head Achim Kussner in charge of day to day dealings with the distributor. The team responsible for each relationship gets together every two months, “So that when we sit down with a few senior people at Deutsche, we know everything going on,” says Mr Charrington. “We spend a lot of time with people in Deutsche branches, and have taken a lot of our distributors from Europe to New York, to meet the senior management of our global private banking business.”

Key positions

While Deutsche says its Private & Business Clients division treats all customers equally, MLIM clearly differentiates between wealthier clients and the man in the street. “Fidelity is doing tremendously well at branch level,” says Mr Charrington, commenting on the German bank’s business model and relationships with external providers. “But we have done the best of anyone in the private banking channel. Fidelity has a bigger, broader, wider brand, and gets to people in more places. They have 180 people in Germany, while we have 17, so we are positioned in a very different way.”

MLIM has received much misguided criticism from IFAs in the UK, who have questioned the US firm’s commitment to European retail markets, “We are committed to the retail market, but through platforms, not IFAs,” says Mr Charrington, whose team has secured UK distribution through Abbey, Nationwide and Skandia, amongst others. “In the UK, distribution power will eventually be in the hands of the big banks,” he adds, in the belief that depolarisation trends will eventually side-line independent advisers.

Bank power

“It will take longer to get there in the UK than in Europe, where there are well-developed, mature markets, legacy and distribution models. But we do not have massive penetration of the IFA market, so we are very excited about power of distribution going to big banks.”

That does not mean the pan-European future for investment products is necessarily a rosy one. “Investors have long-term requirements, with the feeling they need to invest in equities,” says Mr Charrington. “The market started going down rather violently, but the issues requiring people to invest are still there, although the vehicle is not yet defined. We and the distributors need to get our heads around this issue.”

‘The view that

we held after the

market collapse in 2002 was that open architecture was just a fad’ - James Charrington, MLIM