Private View Blog: Price is icing on cake of sub-advisory relationships

Having researched sub-advisory trends for the past 15 years at PWM, it was refreshing from me to see sub-advisers drop their guard at the Fund Forum in Copenhagen in June, where there were plenty of conversations on the topic and some lively behind the scenes discussions with top players. Despite all the usual hype about the growth of this delegated investment approach in the European retail space, sub-advisers talked frankly about their frustrations around falling fees and higher service levels.

Distributors expect sub-advisers to do all the work to promote sales of sub-advised solutions, as for off-the shelf funds, but for half or a third of the fees, depending on the asset class. Sponsors’ commitment to raise assets is low, with the consequence that many sub-advisory deals flop, as the scale promised is never achieved.

Yet, the sub-advisory proposition remains appealing for asset managers, as assets are stickier. According to research from strategy adviser firm Indefi, the asset manager/distributor relationship is 1.7 times longer for sub-advisory than for funds of funds. Findings from PWM’s 15^th annual study earlier this year show that 60 per cent of sponsors have employed their sub-advisers for more than five years. But while overall profitability for asset managers depends on several factors, downward price pressure tends to be more bearable for large sub-advisers, relying on a broad range of investment solutions and people on the ground. It is much harder for boutiques, especially those with less than $10bn in AuM.

“I think the big driver is price, not quality,” complained the CEO of a French asset management boutique. The market is increasingly polarising between large sub-advisers, which partner with “Tier 1” big distributors, and smaller “Tier 2” boutiques, which will continue to distribute through fund platforms. 

This divergence may be further exacerbated by a new trend in Europe, which sees distributors joining forces and pooling sub-advisory assets to create larger scale platforms, which may enable them to negotiate better fees with asset managers.

Leading this trend is the multi-management arm of ABN Amro Private Banking, a long- standing user of sub-advisers, with €28bn ($31bn) in client assets, of which €16bn are sub-advised. The firm reports an increasing demand among competitors to use ABN Amro’s scale and its manager selection and due diligence capabilities, to help them create sub-advised strategies for their own clients. 

“Private banks are looking for a way of differentiating themselves, they want to offer bespoke solutions, for which they are accountable to clients, and sub-advisory is an effective way of doing that,” Alen Zeljkovic, managing director, products and solutions at ABN Amro Private Banking, told PWM.

While negotiating power increases with scale, securing as cheap as possible solutions is not a priority. “We are more and more challenged by our clients around performance; price is just the icing on the cake,” said Mr Zeljkovic.

If you are just looking for the best price, when selecting sub-advisers, you are just “destroying your franchise”, argued a senior executive at a large Swiss wealth manager. “What is key is the value proposition you build for your clients.” Innovation and the ability to build bespoke solutions continue to be important drivers.

Gaining access to niche asset managers, which do not typically have access to European distribution channels, is certainly a differentiating factor for private banks and an important benefit of sub-advisory. As confirmed by PWM’s research, while large firms are the most used sub-advisers, boutiques that add value, offer a convincing story, and perhaps exclusivity of distribution, are likely to continue to be in strong demand.

 Elisa Trovato is deputy editor of Professional Wealth Management. Follow her on Twitter  @elisa_trovato 

Register now for free access to PWM, and sign up for our newsletter.