Time for a change

There has been much anecdotal evidence suggesting banks have closed their shelves to outside providers following the financial crisis, preferring to manufacture funds in-house and keep any profit to themselves. At the same time there are fund groups – whose future lies in distributing products through third parties – who swear the open architecture model is alive and kicking. So what is the truth about the current relationship between fund provider and distributor? And is it just a case of manufacturers needed to fine-tune their models in order to be a success? According to the fund houses, which have teams allocated to servicing key clients in both local retail banks and global distributors, there has definitely been a change of climate. “In Europe, open architecture is dying and it is very difficult to sell funds to banks,” admits Richard Garland, head of distribution at Investec Asset Management for the Emea region. A convenient solution He sees banks and insurance companies choosing one or two groups to whom they now delegate large mandates and believes the sub-advisory model, while convenient for the bank, may not always be in the customer’s best interests. “This is a real threat to open architecture,” says Mr Garland. Investec has tweaked its model in Europe and gone with the flow. Across Switzerland, France and Luxembourg, Mr Garland’s teams now target the fund of funds operations, rather than retail banking groups. The one-off E1.2bn sub-advisory mandate secured with Austria’s Raiffeisen – encompassing global equity, US equity and Pacific equity classes – is now much more typical than the regular annual flows of E200m, which big brand fund groups used to garner from securing a berth with a guided architecture-led retail bank five years ago. That does not mean so-called “global distributors”, with branch networks in several countries, are no longer targeted. Investec does this by selling specialist products investing in sectors including energy, commodities and Africa. “You need something special, then the door opens that bit easier for you,” claims Mr Garland. Even though he believes banks such as Deutsche in Germany, whose partnership agreements span networks in Belgium, Poland and Spain, can be worth pursuing and are likely to sign with Investec, he remains to be convinced whether they will drive business in the long run. Losing faith In fact some marketers actually believe private clients and retail customers are now turning their backs on the previous system, where they demanded a palate of top-performing household name funds. The reason is simple: customers have lost more money in the crisis, often by subscribing to the latest ‘big idea’ funds, than in previous dips and no longer trust the sales spiel. “We don’t feel there is currently any bottom-up demand for open architecture in the Belgian market,” relates Kristel Cools, head of distribution partners in Brussels for Fortis Investments. She believes that working with a proprietary funds house gives both bank and customer a much better idea of what is actually inside a product, particularly when transparency and simplicity are the order of the day. “There have been no strategic decisions made by big financial institutions to go back to proprietary products,” says Fred Van der Stappen, head of sales for Schroders in Benelux. Rather the decision was made for them by the credit crunch and the subsequent recession, he adds. The disastrous state of some local banks, and uncertainty spurred by changing ownerships at ABN Amro and Fortis has also made the job of distributing funds a more complex one. However, the belief among sales staff at fund houses is that as soon as a bull market resumes, banks will relax their criteria and allow more outside partners through the doors, in a bid to sell more funds once customers regain confidence. Many remember the situation – quite typical across Europe – back in 2002, when ABN Amro broke the Dutch mould by beginning to select a handful of external funds for retail banking clients. ING and Rabobank gradually followed the model. “It’s like when one bank raises interest rates for savers,” says Mr van der Stappen. “What do you do – wait and see or anticipate? For the end client it is always better to have a choice of different suppliers,” he explains. The German situation According to Joerg Brock (see box, page 14), the man credited with bringing open architecture to the retail banking market, now working for Dresdner Bank as head of private client portfolio management, German banks are increasingly concentrating on selling in-house funds in order to boost balance sheets, with customers not given any real choice. “If we look at Commerzbank, Cominvest products were clearly in focus over the last two years,” he says. “The business model in Germany has always been turnover led for selling funds. But in a phase like the current one, returns in the bank have deteriorated. In these circumstances, banks will focus on their own fund units and sell their own products.” German bank staff have been given monthly sales targets of how much own brand product they must offload each month, so it is difficult for any funds from external houses to get a look-in, he adds. Over the last five years, Dr Brock and his staff have been carrying out anonymous annual testing across Germany’s major banking chains – including Deutsche, Dresdner, Commerzbank and the Sparkassen savings banks – to see which fund products they would be sold as potential customers. “What you recognise when you do this is that there is no open architecture in Germany, even if they tell you there is,” claims Dr Brock. “There are typically some third party funds in the offering, but the core is always made of house products. Open architecture is talked about in the press, but it is not so in reality.” The view from Dr Brock is that American fund houses such as Goldman Sachs and BlackRock will have a tough time in the current environment. He believes Fidelity may come out better, as it has in the past adapted its strategy to local needs. However, the sales teams at Goldman Sachs Asset Management believe they have managed to adjust their marketing policy to accommodate the needs of today’s fund buyers. Michael Grüner, who heads GSAM’s sales effort in Germany, says the country presents the most important retails funds opportunity in Europe. “For GSAM, no other country merits so much management attention and spending of corporate dollars,” he says. Germany differs from other European markets in that the fund buying public is typically aligned to the universal banking channel, with 80 per cent of assets lodged with the savings banks, and with Deutsche Bank and Commerzbank. The latter two chains have also recently absorbed the Postbank and Dresdner franchises respectively. “That makes advice driven positioning of investment solutions a lot more effective in Germany than other countries,” believes Mr Grüner. “Compare it to France, where you have domestic players, selling domestic products and closed architecture.” A different approach GSAM has been slated before for an excessively institutional approach, with strategies designed for pension funds being leveraged for sale through retail and private banks. Critics claimed the group had scant experience of mass market dynamics. But Mr Grüner says the approach of both Goldman and key distributors in the market has changed. While GSAM has been able to adopt a more adviser-led approach to back its institutional DNA – this has clearly been backed by an investment in staff on the ground to service Germany’s banks on a countrywide basis – the group also welcomes a perceived change of focus among the banking networks. “Deutsche Bank and Commerzbank are thinking: how can we deliver advice and earn trust back? The ‘next hot topic’ or ‘fund pick’ concept is not working any more, as the retail investor is not going to buy it,” believes Mr Grüner, who sees huge problems in the so-called ‘thematic’ approach popularised by retail and private banks. “The retail investor does not want to be called by the adviser, telling them to jump on the bandwagon. They would rather sit in cash.” GSAM is going against the grain of other managers targeting the guided architecture system, who try to penetrate a bank’s defences with a speciality such as commodities or emerging markets. The new strategy is to highlight the manager rather than the individual product. “We are ideally suited to deliver advice as our platform is broad enough,” says Mr Grüner. “We have 75 different strategies available in Germany. This gives us more credibility. There is not a single thematic product in Goldman Sachs mutual funds.” Goldman has long backed its Bric concept, relating to investing in Brazil, Russia India and China, invented by the bank’s own global economist, Jim O’Neill, but this is seen as a long-term structural trend rather than a theme. “Themes like water and solar energy are not long-term and structural enough for us to manage over a complete cycle. This is not what large networks are asking us to do. They want us to help them and educate their advisers,” says Mr Grüner, laying down the roots of a new type of distribution partnership which few fund houses are really equipped for. Mr Grüner is convinced that this institutionally-led, consultative, approach will be the way the European funds industry is heading over the next five years, as it moves away from the previously popular thematic led sales push. Underperforming GSAM’s vision for a new order is backed by consultant Amin Rajan, CEO of Create-Research. “In the last three years, there has been product proliferation, as many products have not worked and clients have chased the next rainbow,” says Professor Rajan. “The open architecture platforms have said: ‘Let’s fill up the shelves, irrespective of what the clients need.’” He believes many fund products have failed to perform once substantial assets have flowed into them from distributors. “They are now looking for strategies where product features are very clearly defined. They want to know the implications for risk, transparency and volatility. Banks want fund managers to understand product features at the most granular level. Products have been put on the shelf before without this understanding.” Across the German border in the Netherlands, there remains faith in the guided architecture approach, particularly at Robeco, where CEO George Möller is about to retire and hand over the reigns to Roderick Munsters, a well known figure in the Dutch institutional business. He believes the notion of allowing prominent guest managers onto banks’ shelves is far from over, and will be spurred by client demand for more diversified portfolios. While some banks may temporarily restrict the sale of third party funds, “this is not the case with Rabobank,” which owns the Robeco group, says Mr Möller. “If I have an account with a bank and I want a Fidelity fund, I will accept nothing else. But there is a question of how the bank pushes it,” he explains. There will always be a need for “specialities” from external managers, believes Mr Mö ller. “Not all banks are good at emerging markets or sustainability, so they will have to offer these capabilities from third parties. But you need unique offerings; if you are not the best, there is no place for you.”