Turning a bewildering choice into a set menu

As banks and insurance companies broaden their menus of external funds available to retail and private clients, commentators are comparing their offering to that of a Chinese restaurant. With a choice of 300 or more products on the menu, diners often find the choice in such a restaurant bewildering. And a couple of hours after eating, they may feel hungry once more. Typically, customers go for their old favourites, or they choose a set menu, where the restaurant has in effect made a diversified, balanced choice for the diner. There is a danger here that the establishment may just be offloading those dishes, which it can sell most cost-effectively. It is a good comparison with the guided architecture system, where an institution provides a selection of “top picks” for clients, pioneered in Europe by Deutsche Bank and Commerzbank, and now catching on in the UK. With new regulations having been introduced in the UK, and most independent advisers no longer able to provide a viable fund selection service, as the distribution power moves to banks, the guided model is beginning to look like the most attractive one. It is already being employed by leading high street banks including Barclays, Abbey and HSBC. Barclays and Abbey have both chosen the multi-manager route, while HSBC has followed the Deutsche Bank model of selling funds managed by preferred providers across the counter. This model is fast-becoming the most accepted in Europe. But don’t think for one minute that it is designed for altruistic reasons. Guided architecture works best for an institution if, like HSBC and Deutsche Bank, it has a very strong fund management subsidiary. This means Deutsche can channel the lion’s share of customers’ investments into its own DWS funds, which are manufactured to order for the bank. This ensures maximum profitability. These funds have enjoyed good performance, and have a leading brand image among German customers. Then, for a few more specialist areas, the customers will be guided into products managed by the likes of UBS, Schroders or the recently-added JPMorgan. This is most likely to be extra money, on top of that which customers have committed to internal management. DWS, despite its initial misgivings, has got used to the fact that it is not actually losing out from the system. The equation is different for Commerzbank, which suffered from poor performance in its fund management unit. Although these problems have recently been addressed, Cominvest lost money to external providers when the system was introduced, and never really recovered these internal assets. Abbey closed its internal asset management unit when it bravely decided to open up all its customers’ assets to external sub-advisers. But now that the funds of its life insurance clients are about to be sold off by new owner Santander, it remains to be seen whether the retail bank will once again invest in internal product manufacturing capacity.