Pushing products for a new era

These days, everybody has become a consultant. Nobody admits to selling products any more, with any real ‘push’ behind them. All parties are now engaged in ‘solution-driven’ packages for private clients, rather than products sold for every opportunity generated by mass client needs.

Yet the remuneration model across Europe is perhaps not yet ready for a new way of selling investment products, claim some of Europe’s largest manufacturers and distributors, while product producers still have much catching up to do. If they can actually provide what clients need, rather than what they think they can sell in bucket loads, without too much effort, then clients will be prepared to pay up for the investment advice associated with the products. Or so runs the argument.

One of the top voices from Europe’s financial manufacturing industry, Axel Benkner, global head of retail business at Deutsche Asset Management, and boss of the DWS funds franchise in Europe, is still, refreshingly, prepared to tell it like he sees it.

“What the customer needs is not the same as what they are buying,” said Mr Benkner, addressing the Fund Forum conference in Monaco, and calling for simplified long-term savings and retirement planning products for European clients.

‘The only interest of a fund manager is now performance. This means it is impossible to have a conflict of interest, or interference from banks’ - Axel Benkner, Deutsche Asset Management

“With distribution, you have agents around the country, so you can’t control it. A typical remuneration strategy for independent financial advisers (IFAs), banks and brokers is always the same: they want to have sales fees. They want to sell the products which have the most compensation, not the best product for clients.”

But the days of manufacturers pushing their products through their captive network of bank branches are now in the past, feels Mr Benkner. “The time is over when fund management companies were purely acting in the interest of the bank that is owning them,” he told the conference.

Sole area of interest

“We have a clear distinction now between our portfolio management and our banking. The only interest of a fund manager is now performance. This means it is impossible to have a conflict of interest, or interference from banks.” This conflict of interest was once commonplace when fund managers were purely “supporting the business of a bank,” said Mr Benkner.

Now Germany has taken the lead in the open architecture movement, where banks and other distributors are offering a variety of external investment products alongside their own, believes Mr Benkner.

The retail banking and private client business of Deutsche Bank, Mr Benkner’s parent company at DWS, enjoys a market share of just 8 per cent in Germany, while his fund management company has 24 per cent of the market.

“This means we have to be elsewhere, for other banks, insurance companies for unit-linked business, plus IFA channels. The highest market share for these is in DWS funds, and we will be benefiting from open architecture, as long as we have the performance,” said Mr Benkner.

Klaus Martini, global chief investment officer for private wealth management at Deutsche Bank, also believes that the financial services industry is very much in need of new distribution and remuneration models.

“This industry has not been innovative over the past 10 years,” said Mr Martini, addressing a breakout group at the Monaco conference. There had been much product development in funds, certificates and structured products, but “the industry does not understand where we are going,” he said.

It is time for banks to rethink their propositions for private clients, to focus on big investment themes, asset allocation and advisory functions, and to de-emphasise obsession with fee margins and the minutiae of product design, believes Mr Martini.

Hand in hand with a new “state of the art” approach to investment and asset allocation, must come a new remuneration model.

No clear answer

“After a discussion with the adviser, either business is done or not and the client walks away. There is no advisory fee. Banking advice appears to be free of charge. This is completely different than lawyers and tax consultants, who are paid by the hour. What is wrong with banking? There is no clear answer.”

The industry has to adapt to a new generation of products, designed under a more complex regulatory environment, fuelled by the European MiFID (markets in financial instruments) directive.

‘Clients are willing to pay if they understand what they are paying for. We can offer a solution-driven approach’ - Klaus Martini, Deutsche Bank

The changing nature of financial instruments must also pave the way to fee-based advice, and away from products with attached fees pushed towards unsuspecting clients. “Mutual funds are now traded on the stockmarket, so you can’t charge any more front end loads,” said Mr Martini. “Front end loads in the retail arena form a substantial part of the revenue of banks.”

The old approach was focused on benchmarks and product sales, with the manufacturer imposing their own asset allocation on the bank or distributor. The roles have now been switched, believes Mr Martini, with banks providing modern asset allocation tools, based on scientific portfolio theory. Allocations, based on long-term investment themes, are then populated by appropriate, transparent, plain-vanilla products, selected by the banks, rather than pushed through the distribution chain by manufacturers.

The experience at Deutsche is that clients will pay for this new approach, provided their portfolios are making or at least not losing money. “Clients are willing to pay if they understand what they are paying for,” said Mr Martini. “We offer a solution-driven approach.”

The key transition, he told the Monaco session, is putting the product at the end of the advice chain, rather than the beginning. There is also an element of quality of investment advice in the themes, such as emerging markets and commodities, identified by bank strategists.

“These are long-term themes – they don’t go away,” said Mr Martini, admitting that in the past, he has been frustrated that fund management partners of his bank have failed to produce products in a timely fashion to match the advice and allocations offered by his staff.

This reliance on headline themes has also been the hallmark of Credit Suisse, one of the major names in Europe’s wealth management industry. The main exponent of this approach has been Burkhard Varnholt, the Zurich-based head of investment products for the Swiss institution.

“The worst thing that bankers can do is be perceived as product sales people,” says Mr Varnholt. “There is much more to be earned from coming across as educated, reasonably intelligent discussion partners.”

This means chewing the fat over global themes such as ‘basic goals’ (encompassing infrastructure, access to affordable healthcare, education, food water and

electricity) and ‘enrichment’ (how increasingly wealthy populations move towards eating organic food, participation in fitness, and how emerging economies increasingly develop values similar to those in traditional, developed markets.)

No longer core focus

With a discussion around such themes, and related investment strategies, product advice will end up “falling out of the discussion” rather than being the core focus of client meetings, believes Mr Varnholt.

“Product advice should only take up 10 per cent of discussion time. This assumes bankers must have a much better understanding of products available than 10 years ago, and we need to provide them with the risk technology to facilitate this task,” he says.

Efficient, technology solutions to product sales need not be prohibitively expensive, says Mr Varnholt.

“Only those who don’t understand technology spend tremendous amounts of money on it. We are talking about simple, web-based technology to facilitate the advisory process. This is very cost efficient. It may not be appropriate for a family office with 10 employees, but for a firm which has the scale we have, it is not a make or break decision.”

While he believes in providing as much information as possible on fund solutions, offering the most open architecture possible, Mr Varnholt believes customers can be sidetracked if they are fed an overload of economic information.

‘We need a recurring stream of reliable income, which can be provided through the use of structured products and balanced investments, using derivatives for capital protection’ - Alain Grisay, F&C Asset Management

“In today’s financial market environment, too often, investors get carried away with high frequency data and statistics on such things as inflation and quarterly earnings,” says Mr Varnholt. But in this era of unprecedented growth in productivity and major demographic changes, they have to focus on the bigger picture, not the detail.

If they are given the right advice, with guidance towards the correct, long-term investment themes, then it is a simple, technology led process to choose the right products from the menu, says Mr Varnholt. “The client advisory service is much more important than the quality of products, absolutely.”

Long-term solutions

A call for simplification of long-term investment solutions also came from product providers speaking at the Fund Forum event.

“The key is to keep products relatively simple, so the individual will keep that product for the next 20 to 30 years,” said Bob Yerbury, chief investment officer of Invesco Perpetual in the UK. “Emerging markets and smaller companies may be interesting for people in the business, but they are completely irrelevant to the public in their financial planning needs. We need to find products that will help them to achieve their aims. People want some element of capital preservation, but the priority is income.”

The need for income was echoed by Alain Grisay, chief executive of F&C Asset Management. “We need a recurring stream of reliable income, which can be provided through the use of structured products and balanced investments, using derivatives for capital protection. To achieve absolute returns, we need a much broader range of instruments, including derivatives and commodities, but not equities.”

But a warning to customers expecting a broader menu of investment solutions comes from Jos Clijsters, chief executive officer of retail banking at Fortis in Belgium.

Answering a question from PWM at the Eurofi retail financial services summit at the European Parliament in Brussels, Mr Clijsters said the responsibility of the bank is to offer the right products, appropriate to the customer.

“But the customer also has a responsibility, and needs to give us information. And if we can’t deliver what he is looking for, he has the freedom to go to another bank. We need to make the argument, to be realistic, to decide what is possible and what is not. When we have to sell the product to the customer, we need to know that it is suitable for the customer.”

Broadening advice

Although Fortis is investing in training for branch staff to give competent advice to retail and private clients, the view is that the changing regulatory environment will mean that there is an increased liability and that there is a danger in broadening advice beyond a basic menu of products.

“There are concerns about MiFID,” said Mr Clijsters. “More information will push up costs, and the client will incur those costs.”

He also fears that banks may ditch the advice model in order to become purely sellers of products. This could lead them to only being able to give qualified advice on their own products, and moving full circle back to the big ‘push’ of old.

“Some banks may stick to execution only, offering products, not adding value, advice, or customer [information]. This will end up achieving exactly the opposite of what we have been looking at for the last few years in the retail bank.”