Sub-advisory relationships ‘tailored to clients’

Sub-advisory delegation and third-party fund distribution are the only ways forward in the UK wealth management business. Richard Saunders, chief executive of the Investment Management Association (IMA), was mentioned at the conference as commenting on the net retail sales of funds of funds, which reached an all time record in the first quarter of 2006. “Within two years, funds of funds will represent at least half of all fund sales. Big companies that distribute their own products and do not outsource or go open architecture are going to die in this wealth management business,” he said. Some speakers at the London conference commented on their preference for the sub-advisory approach or over-the-counter sales of third-party products. David Curtis, head of sub-advisory for Northern Europe at Goldman Sachs Asset Management, diplomatically said that “our challenge is to re-engage the customer base, it doesn’t matter if it is through third-party funds or sub-advisory.” And Ucits III regulation, on which GSAM has based its recent marketing strategy, is the framework that will help them do so. “Ucits III gives us the ability to create a much wider range of products, using different asset classes and different investment management strategies. On the whole, we will meet consumers’ needs in a much greater way,” he said. A strong supporter of the sub-advisory approach, James Bevan at Abbey lists the three main factors that need to be taken into account for considering sub-advisory versus third-party distribution: control, cost and practicality. “Control lies better in sub-advisory, because of the capacity to see the individual transaction going through when you own the customer record,” he said. And if it is true that sub-advisory is cheaper than the purchase of funds, “the minimum amount of money that is put on the table to commence a relationship is a much bigger number than if you are buying a fund,” he added. Practicality also comes into the equation, as in the funds of funds world there are concentration limits which lead to a greater diversity. “However if you want to have a very diversified fund in the sub-advisory space, you have to have a very large amount of money to make it possible. It is a very interesting trade-off and there is no one answer,” said Mr Bevan. The fund manager must take into consideration the client base of the distributor embracing open architecture, said Christian Elsmark, head of business development at FundQuest Europe, the fund platform owned by BNP Paribas Group. “We have seen in open architecture a much greater sophistication in the debate of tailoring the sub-advisory relationship to suit the distribution of the underlying clients. This is why sub-advisory has been the favoured model for a lot of distributors,” he said. Whether the sub-advisory or third-party funds distribution model is employed, fund manager size seems to be an important selection criterion in its own right. Credit Suisse, which runs £1.2bn (e1.8bn) in its multi-management system, has a declared preference for boutiques.

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