In league with the competition

Why do the biggest banks in Europe all want to sell Fidelity products? Yuri Bender researches how the multi-channel model works for Fidelity.

“We’re gonna be the biggest! We’re gonna be the best! We’re gonna be the greatest!” enthused the flamboyant American, as he worked the corridor between two banks of unreceptive journalists on a specially chartered red-eye flight between London and Luxembourg. The contempt of the hung-over hacks soon turned to incredulity as Brian Storms, newly hired as managing director of Fidelity’s European business made his next proclamation: “We’re gonna be bigger than Deutsche Bank!” That was 1993. Ten years later, Fidelity’s pragmatic German-born European chief, Thomas Balk, assesses the predictions of his American predecessor. “In Europe, there is often greater awareness of many well-known local banks than most fund managers,” says Mr Balk, who clearly has his feet firmly on the ground. “But across Europe, we have managed to develop a brand better known than Deutsche Bank.” His assumption is backed by independent research from Sector Analysis, which shows the Fidelity brand as the most respected among Europe’s third-party distributors, ahead of both JPMorgan and Deutsche. According to Sector, Fidelity’s brand strength is strongest among distributors in France, Spain and the UK, and second behind Deutsche in Germany. But rather than competing directly with Deutsche Bank, e100bn fund house Fidelity International has joined forces as one of the German giant’s preferred fund providers. “We thought it was Christmas,” admits Mr Balk, recounting the visit to Fidelity HQ by the top brass of Deutsche’s funds division. “They came here to us and said: ‘We want to sell your funds.’ We asked: ‘Why would you want to do this?’ They answered: ‘If we don’t do it, somebody else will. And we don’t want to lose our customers’.” Personally, Mr Balk respects the Deutsche model – rolled out last year – because it embraces “limited” rather than totally “open” architecture. He says that the bank’s customers are steered towards four providers – Fidelity, Franklin Templeton, Merrill Lynch and Invesco. ‘Fantastic achievment’ In just one year, Deutsche has funnelled $400m into Fidelity funds, which as Mr Balk points out, represents a “fantastic achievement in this bear market”. Despite Deutsche’s reputation, there are even more lucrative targets for German distribution, believes Mr Balk. The big four – Deutsche, Commerzbank, Dresdner and Mr Balk’s former employer, Hypo-Bank – control only a quarter of the retail market. He claims Fidelity’s recent agreement to distribute its Portfolio Selector Moderate Growth fund through Frankfurter Sparkasse, Germany’s second largest savings bank, could be a watershed event. The local government-owned Sparkasse controls the lion’s share of consumer banking in Germany, providing tremendous competition for the big four. And Europe’s largest post office-owned bank, Deutsche Postbank, will sell Fidelity’s European Growth fund through its 700 branches, with access to 10m customers. Mr Balk points to extensive research from Commerzbank, carried out two years ago, which found 50 per cent of clients were already buying funds somewhere else. “They were losing part of a client’s wallet, because they did not offer a choice,” believes Mr Balk. “That was a wake-up call for them when they were deciding whether to go into open architecture.” The Bank channel According to Mr Balk, the bank channel is the most efficient and fastest-growing distribution model in Europe, with German and Swiss institutions the most advanced at selling competitors’ funds. “Italians are not 100 per cent sure about how open architecture might impact their business. They have an underlying fear that opening up to third party funds might disadvantage their own products.” The Fidelity brand, according to Sector Analysis, does not even register with Italian distributors. “But anybody who has opened up, like Citibank, will testify that they have got even more business. And if they did not open up, they would have lost business.” Citibank, BNP Paribas, Credit Suisse and UBS have all agreed to sell Fidelity funds. Fidelity is the only foreign fund provider chosen for customers of Dutch bank ABN Amro. And its rival in the Netherlands Rabobank is also believed to be in advanced negotiations with Fidelity. “Banks hold billions of dollars in low yielding savings accounts paying 1.5 per cent, and most of the money is not needed in the short term,” meaning huge growth potential for mutual funds, believes Mr Balk. “Only 10 per cent of private wealth is in mutual funds in Europe. In the US, the figure is 50 per cent. In comparison, there is no significant penetration here yet. But the issue of pensions legislation must be resolved and that pool of money has to be managed.” While the bear market may delay inflows, he believes there is no challenge to equity funds in the long run. The flagship product for Fidelity’s equity funds is its Luxembourg fund range, holding assets of e21bn and currently distributed in 16 countries. Separate ranges “In an ideal world, we would like one range sold across Europe,” says Mr Balk. “The introduction of the euro has led to the development of a single stock market and a pan-European mutual fund market. Investors in Germany don’t invest in German equities, but pan-European ones.” However, local tax regulations allowing vehicles such as the PEA in France and the ISA in the UK, necessitate the marketing of separate fund ranges for these markets. Fidelity’s multi-channel model also allows it to accommodate the fact that independent financial advisers (IFAs) in the UK are responsible for 80 per cent of fund sales. In June 2000, it launched Funds Network, an online platform for IFAs, which distributes 830 funds from 55 providers, making up 90 per cent of the UK market. But as Mr Balk well knows, intermediaries in the UK already rate Fidelity’s funds highly and use them extensively, so there is little potential for impressive growth. It is the banks, insurance companies and portfolio managers of the Continent, many of whom are just opening up to external providers, where the long-term effort needs to be concentrated.

Pick of the models

• Skandia is an excellent example of an insurance company that has opened up to a limited number of fund providers, including Fidelity, chosen for performance and investment process in an institutional-style selection process. But research from Sector Analysis shows that Fidelity still has a long way to go in penetrating insurance companies.
• Deutsche Bank – the German giant’s “limited architecture” model guides clients through a choice of funds from four key providers including Fidelity.
• Owned by the German post office, Deutsche Postbank has chosen Fidelity’s European Growth fund among products to be marketed through its 700 branches.
• Hargreaves Lansdown, along with other discretionary IFAs in the UK, have a strong history of marketing Fidelity funds to high net worth clients.