Forging the new product delivery chain
In a bid to get their products to high net worth investors, European fund managers are linking up with a wide network of financial institutions, writes Yuri Bender.
A new breed of asset managers is targeting wealthy families throughout Europe. Investment ideas, once the exclusive property of institutional investors, are fast being modified for the high net worth market.
The products have been manufactured by big names such as Credit Suisse, Morgan Stanley and CDC Ixis. They are in the warehouse, ready to be dispatched. One problem remains however. How can the products be most efficiently delivered to customers? Which is the optimum distribution channel? What is the ideal link between manufacturer and client?
CDC Ixis Private Capital Management, which split off as a subsidiary of its Paris-based E300bn parent one year ago, has already gathered E700m in assets from 140 clients.
“Our products are based on pension fund concepts of active asset allocation,” explains Christophe Brulé, chairman of CDC Ixis PCM. “But our challenge this year is distribution.”
Rather than using one single sales channel of distribution, the firm has developed a new model to complement the new style of managing assets.
New style, new model
First, products are marketed directly to clients through a 30-strong team under the Reactis brand for minimum investments of E5m. Second, the parent company’s channels are used – predominantly banks, insurance companies and asset manager platforms.
These funds, aimed more at the mass affluent customer, are branded Ixis Elite. “Separate channels help us differentiate and characterise our business,” says Mr Brulé.
The third way is through distribution partnerships. In France, where there is a huge web of interdependent relationships through a complex network of banking cross-shareholdings, CDC Ixis has a ready-made partnership. One of its major shareholders, Caisses D’Epargne, a group of regional retail savings banks, gives CDC Ixis access to an extra 16m customers.
Partnerships are also being developed to sell products outside France, including with SanPaolo IMI in Milan and Pictet in Geneva. “It is not a good idea for us to go outside France with a physical presence. It is better to have distribution partners. Pictet is particularly interesting for us, because we don’t compete with them in the same market,” says Mr Brulé.
The asset management arm of Société Générale, another major French institution, running E240bn, also uses a variety of distribution outlets.
“The culture is changing. Money now comes in from large warehouses all over the world,” says Vincent Barzin, distribution manager for SG Asset Management (SGAM). In the early 1990s, European fund houses basically siphoned off cash from the branch customers of their banking parent groups. Now there is a move to the higher net worth clients of brokerages and private banks further afield. Companies such as SGAM have physically separated themselves from their banking parents in order to bring in money from these third-party sources.
Rich clients
HSBC’s private banking operation, CCF, has selected five managers, including SGAM, to run assets for wealthy clients. And in Italy, a 15-strong marketing operation has won distribution deals with banks including SanPaolo IMI, Intesa BCI and Monte dei Paschi di Siena.
These are usually through private banking mandates known as GPFs, a special off-the-shelf structure used to run assets for wealthy individuals on a multi-manager basis.
But Stefano Russo, Milan-based managing director of European distribution at Morgan Stanley Investment Management is disappointed at Italy’s lack of progress in moving towards a mutual funds-led mandatory pensions system. So he is re-directing distribution resources elsewhere.
“We were hoping to see more reforms in Italy, but there is an unwillingness from the government to make changes,” says Mr Russo. “In fact, that is the picture right across Europe.”
Lean times
Currently, Mr Russo is bullish about sales to funds of funds, GPFs in particular. “But on the pure distribution side, we are a little less confident in funds sold through bank branches. It’s also a lean time for financial advisers.”
Mr Russo’s funds recently broke the E15bn barrier. “As manufacturers, we work on the back of the success of domestic financial institutions. When they slow down their business, we slow down ourselves,” he muses.
Morgan Stanley is currently involved in a push to diversify its client base in favour of non-US assets. Mr Russo sees two key planks to this strategy.
He believes depolarisation in the UK could be one of the most important developments for fund sales during the next five years. Changes in the pipeline mean distributors will no longer have to identify themselves as either independent financial advisers (IFAs) or tied salesmen restricted to one product.
Insurance companies
Morgan Stanley will be targeting UK banks, funds of funds and other domestic financial institutions, and has already restructured two open-ended funds in anticipation of the changes.
The other target is European insurance companies, with Morgan Stanley providing the underlying funds for a variety of capital-protected structured products.
“Insurance companies have traditionally been very protective of what they do,” says Mr Russo. “They tend to cook and eat in their own kitchen. But now they are opening up.”
Funds popular for these structures include Global Brands, one of the branches of Morgan Stanley’s Luxembourg-based open-ended range, investing in a 40-stock portfolio of strong franchises including Cadbury Schweppes, BAT, Danone and Nestlé.
Banks and insurance companies account for 80 per cent of all European business at funds house Gartmore, where head of global bancassurance, Steen Steinke is expected to double funds to E7bn within five years.
“We must be very realistic,” says Mr Steinke. “We are living in unusual times. There is huge uncertainty caused by three years of bear markets and now war, so we need to continue to build up our model for bancassurance business, in the expectation that growth will return at the end of this year and next year.”
Experience in the market has led Mr Steinke to take a much more targeted approach than previously. When he joined Flemings in 1992, he pioneered retail distribution of Luxembourg-based cross-border funds, competing against Fidelity, Mercury and Threadneedle.
“We were signing distribution agreements with everybody,” he remembers. “It really was the scatter-gun approach. We would just get names on the forms and sign the deals.”
Today, he predominantly targets the funds of funds operations of European banks with Gartmore’s expertise in European equities.
Typical links are with Alfunds in Spain, French private operation Banque du Louvre and Deutsche Bank in Germany.
Gartmore has taken E1.5bn from the German market since 1995, from the top 20 per cent of the distributor base, according to Mr Steinke.
He is conscious that in some jurisdictions, including Germany, top distributors will also include IFAs.
“At Gartmore, we made the strategic decision not to have the capability of servicing every independent adviser,” reveals Mr Steinke. “Large players, certainly, but not the old Flemings notion of every one-man-band.”
He believes IFAs in Europe will increasingly channel their business through platforms, owned by banks, which can consolidate the IT expenditure.
“There are too many platforms at the moment, but once they are in the final stage of development, we will focus more on these channels.”
Key channels
“IFAs are often more stable in their assets than banks, but they are not a channel which will grow much,” believes Matteo Bosco, managing director of Credit Suisse Asset Management (CSAM) in Milan.
He says banks are the key channel of growth in markets such as Italy, because any independent advisers – including the all-powerful Promotori – have recently transferred their allegiance to large banks. Deutsche Bank has recently bought its own network of 1500 Italian financial advisers, Finanza E Futuro.
Mr Bosco says the key challenge for third-party foreign fund manufacturers such as CSAM is to concentrate on building relationships with the handful of banks, such as SanPaolo IMI, who are truly opening up their architecture to outsiders.
“If, like some of our competitors, you have 300 partnerships, then only 50 of these are usually working and 250 are not. We just talk to the most respectable private banking and wealth management organisations. We have a much more focused strategy than some of our competitors.”
Management fees
The problem with smaller banks, says Mr Bosco, is that they want a huge cut of management fees. “The selection criteria of many banks’ GPF programmes are not really professional,” believes Mr Bosco. Rather than looking at a fund’s investment process or track record, many banks just demand 70 per cent of management fees to have the fund on the programme.
“We have 90 per cent of our total expenses in the management fee, so I can’t afford to give away most of our earnings,” continues Mr Bosco. “But other competitors have a huge difference between their total expense ratio and management fee and have just 50 per cent of expenses reflected in the fee. They seem prepared to give away 70 per cent, but in reality, they are keeping a lot.”
This tendency of distributors to sell only the funds which reward them most is the reason given by chief executive of Mediolanum Ennio Doris for using exclusively tied sales agents to market wealth management products.
“Advisers must always face the situation in the market,” believes Mr Doris. “They will always choose services which are more profitable for them than their customers. This is what has happened in the past and what will happen in the future. Therefore the future is in the hands of tied advisers, not independents.”
Platform based solutions make their mark in germany
If the saying that history repeats itself is true, Europe’s banks are about to go head to head with independent financial advisers in an almighty fight for market share.
By adopting open architecture, European banks hope to stem any flow of client defections to independent financial advisers (IFAs), and avoid the fate of their US counterparts.
In the US, financial advisers were quicker than banks to latch on to the open architecture concept. When fund supermarkets appeared on the scene, IFAs logged on and began offering clients access to hundreds of investment funds.
Banks were, understandably, wary of offering funds managed by anyone else. They stood to lose a cut of the fees, to damage the integrity of their brand and potentially faced the trouble of selecting and monitoring external fund managers.
In the long run, US banks would have done better to bite the bullet and embrace open architecture, says Eric Macy, assistant vice president for distributed products at US-based securities service provider Brown Brothers Harriman.
He argues that the banks’ failure to broaden their product range led customers to “flee in droves in favour of supermarket-driven solutions”. Mr Macy warns that if banks in Europe “don’t shape up” their market will go the same way.
In Germany, while banks sold 71 per cent of all products in 2002, research house Cerulli Associates expects this share to fall to 66 per cent by 2006. The 13 per cent share of financial advisers
is expected to rise to 18 per cent in three years.
The fact that German advisers have embraced platform-based solutions is crucial to their success, according to Cerulli’s analyst Stephen Irving. Subscribing to these platforms boosts their advisory capabilities because they gain access to a wider range of funds and analytical tools.
He says IFAs are adopting asset-based fees to remove any bias in favour of particular fund managers, while banks are seen as incapable of providing truly independent advice.
But Stefano Russo, managing director of European distribution at Morgan Stanley Investment Management believes the debate is a cyclical one. “IFAs are traditionally much better than banks in holding onto clients in difficult markets,” says Mr Russo. “Banks are more successful in normal to positive markets. So after three years of bad markets, the issue of IFAs doing better always comes up. Banks in Germany still have a tremendous amount of goodwill with clients.”
Roxane McMeeken
