Steering towards open choice

Banks, keen to cling on to a reputation as asset managers, have

traditionally been quick to claim that retail clients are happy to buy

internally managed investment products.

But the chiefs of the biggest financial services providers across

Europe are slowly coming to a realisation: in order to hold on to their

wealthiest clients, they must often be prepared to surrender the

management of assets – and the corresponding fees this attracts – to a

third party.

HSBC is a case in point. It has a huge funds franchise, with more than

$179bn (E142bn) under management. Yet its global private banking arm,

HSBC Republic, has outsourced asset management to US multi-manager SEI.

In the UK, HSBC high street branches preparing for next year’s

regulatory changes have already appointed a selection of external

managers.

Modern banking

And in France, HSBC is refining a long-standing open architecture

model and honing the delivery of products to keep clients happy. “The

modern definition of a private bank is an institution which can have a

very long-term relationship with a client,” says Gérard de Bartillat,

chief executive officer of HSBC Private Bank France, responsible for

client assets of E14bn. “To do this, we always try to find the best

services and products for our clients, even if this means choosing

those made by others.

‘It is crucial to clients to have an independent selection of

products – in fact it’s a necessity. If we have to sell our own

products, we

lose clients’

Gérard de Bartillat, HSBC

“The more you focus on big clients, the more you will have open

architecture. It is crucial to clients to have an independent selection

of products – in fact it’s a necessity. If we have to sell our own

products, we lose clients.”

HSBC’s French private banking arm has recently combined several

institutions including Banque du Louvre, which pioneered manager

selection since the late 1980s, Banque Eurofin, CCF Banque Privée

Internationale and HSBC Republic in France. While some of the

individuals who created the Louvre process have left in the recent

corporate re-structure, the open architecture system will remain the

key plank of the strategy going forward.

“Louvre has 15 years of experience and was one of the first banks in

France practising open architecture since the beginning. This means we

have partnerships with some very well known groups. A lot of the big

retail banks now want to do the same thing, but don’t necessarily have

the experience,” smiles Mr de Bartillat, referring to competitors such

as Crédit Agricole and BNP Paribas.

White labelling

But the wind of change is also blowing up the Champs Elysées and into Avenue Kléber, home to the headquarters of BNP Paribas.

Here Vincent Lecomte, chief operating officer of BNP Paribas Asset

Management, also doubles up as head of fund selection for all the BNP

Paribas internal distribution channels. These include group-owned

insurance companies Natio-Vie and Cardif, BNP’s private banking

division, the Cortal Consors fund supermarket and the huge retail

banking branch network.

‘If you provide too many funds, a client will get lost. Retail clients are not yet well educated enough about products’

Vincent Lecomte, BNP PAM

This multi-channel approach currently involves offering white labelled

funds, managed by external managers, through the group’s private

banking outlets in Italy, Austria and Luxembourg. External advisers –

some of which have been used for up to eight years – are carefully

chosen so as not to include any direct competitors. Some Parvest

labelled sub-funds are delegated to Neuberger and Bermann, T Rowe

Price, Alliance Capital and MFS. “This is a very focused approach,”

says Mr Lecomte. “We don’t want to deal with hundreds of external

advisers. We deal with partners who want to focus on a managed

approach, who don’t want to enter the European distribution arena.”

This approach is much more like a strategic partnership rather than

just selection of funds, he reveals. “In a fund of funds, you just buy

and sell, with some knowledge of the managers. But in sub-delegation,

you need a much deeper relationship with the managers. You need a

personal fit to share the same objectives.”

The jealously guarded brand name of BNP Paribas means that retail bank

branches currently do not sell external products in France, although

the separately branded insurance companies and private banking division

do.

Outsourcing costs

“The cost factor should not be forgotten. To outsource production

costs too much money at this stage,” says Mr Lecomte. “But I personally

believe that our network will have to open up at some stage. It won’t

be the same approach as Deutsche Bank, selling external funds in retail

branches. We don’t believe it will be in their interests to provide all

products, because if you provide too many funds, a client will get

lost. Retail clients are not yet well educated enough about products,

but that’s about to change, and as an asset manager, we need to get

them what they want.”

It is clear that both HSBC and BNP Paribas see wealthier clients as

more suited to open architecture. This approach also seems to fit in

with their business models, which offer an “industrialised”

manufacturing process for the retail client and a more tailored fund

research and selection process for the high net worth individual.

For Dutch private bank Insinger de Beaufort, which adopted an open

architecture model in 1996, this meant gradually diverting brokerage

clients into the more cost-effective multi-management products.

Third parties

But less than 50 per cent of their $5bn (E3.9bn) in client assets

is currently managed by third parties. “A large group of our clients

still hold bonds and equities such as Shell,” says Insinger’s managing

director Guy Ester. “We are gradually moving people out of Dutch

equities and into high yield, hedge funds and areas where we can add

value rather than just discussing whether to hold Danone or Nestlé.”

While delivering products managed by external managers, Mr Ester

believes private banks should keep their distance from fund managers,

in order to protect the interests of wealthy clients. “We do not

manufacture any products ourselves, but we avoid strategic

relationships with fund managers. They are always trying to get into

them with us, and it’s what they should be doing, but it’s not part of

our business model.”

At Swiss private bank Pictet & Cie, it is seen as essential to

deliver externally managed products in order to keep a relationship

with these clients.

Pictet tries to persuade private clients to use its global custody

service, which includes reporting and performance analysis, to ensure

the client is always owned by the bank.

“If you analyse managers through a report and see that their core

competencies don’t necessarily match what they are doing, then we can

re-allocate managers,” says Heinrich Adami, managing director of Pictet

& Cie operations for Germany and the UK. “The client might even

want to replace Pictet for European equities. But it is always better

to be honest and lose the mandate, but keep the whole family office

relationship intact rather than lose the client altogether.”

This relationship, where investment services are delivered by a private

bank to a family is particularly strong in Germany, where Pictet is

keen to build its business. “You only hear what a fantastic market

Germany is, you never hear about the competition,” says Dr Adami. “Not

even Deutsche Bank can say they dominate asset management in Germany,

even though they have been there forever. That makes it slightly easier

for us to deliver.”

This fragmented market means the regional savings banks, known as

Spar-kassen, have as much, if not greater, access to wealthy

individuals than Deutsche, Dresdner and Commerzbank.

That is why US managers such as JPMorgan Fleming (JPMF) are

concentrating on these local players rather than the giants. “There are

400-plus Sparkassen with 40m clients, which means more than half of the

population of Germany has business with savings banks,” says Jens

Schmitt, managing director of JPMF Asset Management in Frankfurt.

“Compare this with Deutsche Bank, which has just 8m clients. And the

profitability of savings banks has increased dramatically on the wealth

management side.”

Schmitt: focus on local players

Mr Schmitt believes this has been achieved through the Deka platform,

which offers funds managed by JPMF, Swissca and Lombard Odier through

branches of all the Sparkassen. JPMF has enjoyed inflows of $9bn (E7bn)

from these outlets.

Delivering solutions

JPMF is not alone in talking about “partnering distributors,

identifying the needs of clients and trying to deliver solutions, not

products.”

At Goldman Sachs Asset Management (GSAM), which raised E3.1bn in gross

business last year, Axel Hörger, managing director of GSAM for Germany,

is targeting clients who pursue “alpha generating” strategies as well

as fiduciary clients who aim to outsource their asset management

capability. “Some small and mid-sized financial services companies

might consider total or partial outsourcing of their asset management

activities due to increased cost pressures, poor investment results,

declining assets under management and changes in the regulatory

environment,” suggests Mr Hörger.

This is also an area being targeted by Threadneedle Investments, which

recently moved its German marketing team from London to Frankfurt.

Glas: reaching the rural customer

“We originally concentrated on striking distribution networks with the

top IFA retail groups,” confesses Mathias Glas, head of Central Europe

for Threadneedle Investments. “But our strategy gradually expanded over

the years, moving into the semi-institutional area of banks and

insurance companies. We are also putting more resources into the

Sparkassen and Volksbanks sector, which gives us a good opportunity to

get very close to the German customer, even in rural areas.”

Fidelity, one of the key proponents of open architecture, faces a

similar challenge in Europe. “What we are trying to promote next to our

well-known equity capacity is fixed income expertise,” says Hans

Goosens, Amsterdam-based director of Dutch business for Fidelity

Investments.

Goosens: ‘Dutch market behind’

Bond funds, he says, have been given a “tremendous push” by the

relaxation of Dutch tax laws, which previously punished

income-producing investments.

But the Dutch are still behind their Continental counterparts in open

architecture, believes Mr Goosens. He has been in dialogue with ABN

Amro’s banking network since 1993, came close to a deal in 1998, but

achieved a distribution agreement for Fidelity funds only in 2002.

“This was the first moment when one of the big banks said we are going

to sell third party products,” says Mr Goosens. “There are clear signs

that ING and Rabobank will do the same.”

But which products are actually sold by branch staff depends on what senior management says, he believes.

“This is clearly starting to work in the case of ABN Amro,” says Mr

Goosens. More than $60m (E48m) has flowed into Fidelity funds in just

six weeks. “There is still a kind of preference for their own, in-house

funds, but the percentage of third party funds they are selling is

steadily increasing.”

The pricing of funds is also key to this decision, says Mark te Riele,

director of sales to Dutch distribution partners at Fortis Investments.

“Our relationship with Fortis Bank is changing,” he says. “We are

gradually getting more autonomous, but we share the biggest part of our

fee with them. They will always benefit more from selling our funds

rather than external funds through their branches.”

Te Riele: ‘Amsterdam advantage’

But the delivery channel remains crucial, believes Mr te Riele. “Three

years ago, we were looking at Europe as the home market and thought

that a Luxembourg range can be easily sold in the Netherlands. But what

we have found is that listing those funds on the Amsterdam stock

exchange gives them a huge boost in sales.”