Secrets of a successful distributor

Bank staff need to be committed to selling funds in order for a distributor to succeed in Europe, writes Yuri Bender.

When Frank Russell and Schroder recently joined forces for a new distribution venture to target high net worth clients, the move reflected a sustained market trend from groups with strong brand names in wholesale asset management.

The deal will mean individual clients of Schroder Private Bank can buy into Russell’s externally-managed range of global funds, originally developed for demanding institutional investors. Using the funds as building blocks, Schroder will design bespoke portfolios for private banking customers.

Both parties have been aware for some time that the institutional market has matured and that the future for fund houses lies in the burgeoning wealth management sector. The key to unlocking profits is the selection of reputable, innovative and internationally minded distribution partners.

Fund managers using banks for distribution in Europe have enjoyed mixed fortunes, depending on which distributor they link up with. And Schroder, widely tipped as a takeover target, has yet to prove itself in this arena.

Americans have already learned valuable lessons about Europe’s distributors. US multi-manager SEI Investments managed to raise E3bn from an agreement with Mediolanum in Italy. SEI was impressed with the thorough staff training approach of Mediolanum’s enigmatic chief executive Ennio Doris, himself a former financial adviser.

But a much larger investment from SEI into a joint venture with French bank CCF yielded only E25m from local investors. CCF staff were less interested in selling SEI products than securing their positions within a new structure after being bought by HSBC.

A distribution war is being fought in France by large consultants turned multi-manager players, including Russell, SEI and Watson Wyatt. Their foot soldier distributors are the larger retail banks including Crédit Agricole, BNP Paribas and Société Générale (SocGen).

Currently, sales staff at BNP Paribas are slaying all in front of them.

Eye catching campaigns

“The best communicator in the French market is undoubtedly BNP, particularly for guaranteed products,” says Jean Castellini, managing director of Frank Russell in Paris. “Their striking movie-orientated advertising campaign caught the eye. And their products were loaded with fees, so the banking distribution network loved it.”

The question mark over some of BNP’s rivals concerns whether their top managements are fully committed to distribution of third party products.

Jean Luc Paraire, head of the new funds manufacturing division at France’s largest bank, Crédit Agricole (CA), signed an agreement with Watson Wyatt in October last year, with the European consultant providing research on external equity managers.

Funds available to CA clients now include those of French competitors Axa and SocGen as well as Jupiter, a UK subsidiary of Commerzbank.

But there is already some doubt about the efficiency of this distribution channel. The majority of the E300m raised this year has come from institutions rather than wealthy clients. “It is difficult at this stage to sell risky products to retail clients,” says Mr Paraire. “We have some marketing difficulties because there are so many products. The situation is confusing both for clients and our branch network. We need efforts for best positioning of our products with bank staff.”

Frank Russell has no such complaints about its key French bank distribution partners SocGen and Crédit du Nord, which together have channelled E4bn of client monies into multi-manager products.

Innovative partners

In the mid-1990s both banks launched fonds profilés, fund products that allow investors to choose their level of risk. These have both equity and fixed income components, which can managed by different fund houses. The two banks together share a 25 per cent share of this market.

“When we signed an agreement with Crédit du Nord two years ago, we decided their fund offering needed marketing support, but they were definitely in the forefront of innovation,” says Mr Castellini. He stresses the importance of a distributor willing to expand the relationship.

A fund of hedge funds will soon be sold to “medium affluent clients” of Crédit du Nord with E150,000 to invest. The next stage is the development of a ‘Pea’ tax advantageous account.

“Ours is a partnership driven business,” says Mr Castellini. “We can launch new funds for our partner banks, but we rely on the distributor’s expertise and knowledge of the client.”

Russell gives bank clients access to a range of external fund managers including JP Morgan Fleming, BGI, Merrill Lynch, APS in South East Asia, BEM in Australia and smaller US managers such as Suffolk and Jacobs Levi, which do not offer funds in Europe.

“We will give retail investors access to institutional-like management quality,” says Mr Castellini. But Russell is conscious not to bombard distribution partners with too many funds for their clients.

“If somebody has never tasted olive oil and you give them 2000 brands, how do they know which one goes with salad and which one goes with pizza?” he asks.

For future distribution agreements, Russell will be examining telecom companies across Europe, sports clubs and department stores. “Future partners will have strong brand names such as Manchester United, Au Printemps or France Telecom,” reveals Mr Castellini. However, he is reluctant to use fund supermarkets for distribution purposes.

“If they offer more advice, and not just choice of funds, then they will have a brighter future,” says Mr Castellini. But with the current situation of several thousand funds available through a platform, “too much choice kills choice. The Germans have a saying – he who has the choice has the torture.”

German beauty parades

Despite this pearl of Teutonic wisdom, Germans are implementing open architecture faster than other countries, according to Rudolf Siebel, deputy managing director of German mutual funds association, BVI. He says not only major German institutions such as Commerzbank, but also the smaller credit unions and savings and loan players, plan to replace investment income through asset management or distribution fees.

In practice, says Mr Siebel, the most successful distributors offer restricted architecture, working from a limited list of preferred providers chosen through a beauty parade.

He says it would be a logistical nightmare for any distributor to provide prospectuses to clients for the 6000 funds registered in Germany.

German banks are willing to deal with third party fund providers, but need a full service proposition and marketing support, says Mr Siebel. He says 15 customised distribution platforms are currently in use, including those owned by Fidelity, DWS and Commerzbank. “These are trying to get the interest of a large number of independent financial advisers (IFAs) to make the whole thing eventually viable.” But insiders expect there to be only three distribution platforms in Germany in the long-term.

“IFAs are struggling as to who to select – who is providing the best services at which prices? Which platforms will survive? A number of brokers in Germany are working with two different platforms, so if one of the two goes bust, you are still safe with the other one.”

Five tips to keep your bank in business

The Schroder model of using the institutional business as a solid base on which to “superimpose the younger areas of retail funds and private banking” was laid down by managing director John Troiano after the sale of the investment bank a year ago. Since then, Schroder has reaffirmed this plan by unashamedly appointing Sally Tennant – former institutional business development diva at Gartmore – to be its sole chief executive of private banking.

“As part of our new direction, we are offering open architecture to clients and doing it in the best possible way through a multi-manager offering,” she says.

Ms Tennant says the agreement with Russell differs to traditional European deals with retail banks. “We offer a completely and utterly bespoke service, it is not an off-the-shelf product. The objectives, risk-profile and time-frame vary according to the client. We don’t just buy a load of funds which you can’t unbundle. Frank Russell has one fund per asset class. They chose the world’s best managers, to tailor institutional portfolios.”

Ms Tennant has five tips for private banks to be successful distribution partners:

1 Have a good understanding and belief in open architecture – “that is one reason why Frank Russell chose us.”

2 Share a similar vision with the product provider – “we both believe strategic asset allocation is vital for us long-term. Plus the secret is that it is win-win agreement – both parties benefit.”

3 Offer diversification, choice and objectivity – “that’s what our clients want.”

4 Offer a big benefit to the provider, promising to increase assets under management.

5 The distributor must benefit too. “Frank Russell has agreed to refer private clients to us. We will use them for our family office business as well.”