Bespoke solutions for the retail investment space

After several years of growth, retail sub-advisory has come of age. It has become the new battleground for an increasing number of global asset managers, joining the fray along with smaller, specialised firms, all jostling to secure the management of assets on behalf of wealth managers and other product distributors. 

But the delegated approach, where money is run in segregated mandates, is a tough one, which rewards best performing managers with robust infrastructure and risk management capabilities, able to gain in-depth understanding of client needs while offering strong after sales support. 

The stakes are high, as gaining client trust most likely leads to winning a greater number of mandates from the same firm, generally across a broader range of asset classes, and to establishing long-term, lucrative relationships. But if things turn sour, the risk is to lose the client all together. 

In the European retail investment space, fund managers’ goal is acquiring market share by entering the limited, carefully selected circle of partners of key wealth managers, private banks and insurance companies which have long used the sub-advisory route. This approach is generally preferred for long-term, strategic asset classes, which typically require bespoke investment solutions, and in which client assets reach – or are expected to achieve – critical mass, the minimum generally being around €100m ($123m). 

And the prize is high: PWM’s annual ranking of the best sub-advisers is eagerly awaited by players in this field. In the 2018 survey, BlackRock reached top spot, but Invesco, the global asset manager with more than $945bn in AuM, moved up two positions from the previous year, and ranked second out of a prompted list of 30 prominent players, emerging as third most used.

PWM’s 14th annual sub-advisory survey focused on 20 of Europe’s biggest distributors, including private banks, wealth managers and life insurers, as well as asset managers delegating part of their assets. Combined those interviewed manage €1.5tn in client assets, 25 per cent on a sub-advisory basis, using more than 450 sub-advisers in total.

“We believe the sub-advisory approach represents a 360-degree relationship with clients and distributors,” is the proud statement from Sergio Trezzi, head retail distribution, EMEA (ex UK) and Latin America at Invesco. “You really need to understand client needs and be able to design customised solutions for them at the right time, offering transparency and high service levels. You need people on the ground, in different countries, who speak the local language and understand the local culture.” 

Working “hand in hand” with a distributor’s fund selection unit allows the creation of bespoke investment solutions, which can meet advisers’ requirements in full, says Mr Trezzi. This makes the whole process of explaining and selling products to private bankers or advisers much easier,  compared to off-the shelf funds.  

Moreover, a sub-advisory mandate offers a higher level of portfolio transparency, with information on fund holdings available daily, as opposed to monthly factsheets of traditional mutual funds. This enables the distributor to feel “in control of the asset manager” and increases trust in the relationship. 

With profit margins squeezed by costly regulatory requirements and higher investments needed to upgrade technology, digitisation skills and risk control – while investors expect fees to decrease – the asset management industry is under pressure. And sub-advisory is just one of several elements driving consolidation, states Mr Trezzi. To survive and thrive in this increasingly competitive space, asset managers need to have scale and a global platform offering a broad range of investment solutions, from active to passive, from factor based to environmental, social and governance (ESG) investing. 

“Investment solutions need to be scalable at global level, because distributors, especially large ones, are looking for global firms, for a one-stop shop that can meet all their needs, as opposed to the small boutiques of the past.” 

Fewer and fewer asset managers are able to support distributors in the sub-advisory space, believes Mr Trezzi. “It is not a game for everyone, the barriers to entry are high, and the winner will have the opportunity to take a bigger market share.” 

PWM’s survey shows the top rated and most used sub-advisers are large, global firms, even though 55 per cent of respondents claim to prefer niche or specialist sub-advisers. Boutiques, or small managers operating in one country, perhaps offering one or a handful of asset classes, are going to struggle, predicts Mr Trezzi, but competition comes from medium-sized players, seeking a way into Europe through this approach and who are mistakenly labelled as ‘niche’ simply because they lack a distribution network on the continent.

Natural progression

Invesco moved into the sub-advisory business around five years ago, almost as a “natural progression” during their journey with clients. “Today, sub-advisory represents a significant part of our business, to which we dedicate substantial resources, and the broad range of products on our platform enables us to meet strong client demand,” he says.

With a long track record in active management, Invesco is also the world’s fourth-largest ETF manager, having acquired PowerShares in 2006 and three further firms over the past couple of years – including the ETF business of Guggenheim, Source, the London-based ETF provider and Jemstep, a robo-advice provider that specialises in building investment portfolios with ETFs.

Grouping all types of investment solutions under one commercial umbrella, led by Mr Trezzi, allows avoiding internal conflicts. “We put the client at the centre, we understand their needs and we search for the right investment solution, be it a mutual fund, an ETF or a sub-advisory arrangement,” explains Mr Trezzi.

Moreover, the firm recently unified the business under one global brand, dropping subsidiary brand names, including Perpetual, PowerShares and Trimark. “The unified brand reflects the mentality which we have already instilled internally, and are now projecting externally,” he says. 

While most of Invesco’s mandates are in equity and multi-asset products, fixed income has been driving business growth more recently. “Client demand for sub-advisory mandates has moved from equity solutions to searching for income, mainly through multi-assets, with a focus on fixed income in the last 12 months,” says Mr Trezzi.

Bonds are a relevant part of investors’ portfolios, but with central banks withdrawing monetary support, and interest rates expected to rise, investors are seeking tailored solutions. “We are seeing strong demand, from the smartest distributors, for active management of fixed income, for active multi-sector or multi-credit.” This asset class gives managers the opportunity to move along the entire yield curve, the final goal being to add value, and leverage all possible elements in the bond space. 

When allowed by regulation, and within clients’ guidelines, fixed income mandates can also gain exposure to ‘alternative’ fixed income, for instance including bank loans. 

“Fixed income is potentially the only truly global asset class in the investment world,” says Mr Trezzi, “and the most challenging to manage, today, including long and short positions. You need a global platform, a strong risk system and smart managers, as well as continuing to add new resources.”

For several years, the great majority of PWM’s survey respondents have been expecting more institutions to take the sub-advisory route, with most growth expected from private banks and wealth managers. But is this really happening?

“The market is growing across all countries in Europe, but I don’t think this is due to new entrants,” argues Mr Trezzi. “We have seen growth coming from existing users of sub-advisory, such as private banks who have increased the number of mandates and are delegating management of additional products or looking for new ideas because their business has grown. We have not seen new entrants, or at least not in such a strong way as many people expected,” he says. 

But with MiFID regulation recently coming into force, more wealth managers may be driven to embrace this approach in the coming years. It will only be available to medium and large wealth managers, as customised products call for economies of scale.

“Many companies are still reorganising themselves with regards to MiFID, which will require a stronger link between distributors and asset managers, to be able to match clients’ needs and risk profiles to investment products. This will drive partnerships with a smaller number of managers.”

Through sub-advisory mandates, distributors can control the product’s fee more actively, and replace the sub-adviser more rapidly, without notifying advisers and clients. 

As the markets’ Goldilocks era nears its end, and volatility increases, the ability to invest for the long term, rather than following trends, will separate the good from the bad distributors. It is exactly in this challenging, end of market cycle environment in which a close partnership between the asset manager and distributor, constant communication and transparency is crucial, states Mr Trezzi, explaining that not all investment decisions may pay off in the short term. 

Personnel changes is the most important driver for replacing sub-advisers, say PWM’s respondents. While this factor is true for any fund, it has even greater importance for a sub-advised one, where the added value comes from being bespoke, he explains. 

Invesco’s policy is to make sure clients understand the firm’s investment process and team approach to product management, across all funds. Training advisers is paramount, even more so today, as legal requirements have increased, and many sales people at the firm have an investment background.

“Many asset managers think ‘we have won the mandate, it’s done’. We believe this is when the major work starts. We need to involve distributors, communicate with them, making them feel a key factor in the success chain. After you have won the first mandate, either you lose it or you win more mandates, there are no half measures. That’s the beauty of sub-advisory.”