Preferred providers approach proves its worth to Deutsche

Deutsche Bank’s strategy to sell the funds of eight preferred providers to the 8.5m customers of its branch network in Germany, another 5m globally plus affluent clients of its Private Wealth Management (PWM) unit, has been reviewed several times since it was launched among much internal controversy three years ago. There were questions relating to profitability, sharing of revenues between distributor and manufacturer and whether selling the funds of so many external groups would hamper the fortunes of the internal asset management unit, DWS. “My personal feeling is that the initial situation with DWS is now a thing of the past,” says Dominic Blum, who is responsible for all products sold in Deutsche’s vast branch network in Germany and elsewhere in Europe. “DWS has seen that it can make profits from third-party distribution. It has seen it is not a question of taking money away from them, but increasing distribution – our system means more money for everybody.” Any lingering doubts have recently been swept aside. Deutsche Bank’s first quarter results for 2006 show an 11 per cent increase in retail banking revenues to ?1.3bn, powered by growth in private client investment activity. And manufacturing groups are now adjusting their distribution strategy, not only to court favour with Deutsche, but to anticipate the move of other European banks towards similar business models. The sign that this system of guided or controlled architecture is now expected to stay for the long term has come with the appointment of JPMorgan Investment Management as the bank’s ninth strategic partner. Like the other groups, only certain funds, the top picks, all first quartile performers, will be marketed to Deutsche’s retail and private client base. In JPMorgan’s case, these will be European and US equity and bond funds. This fits in with current Deutsche strategy to overweight these areas, in addition to the Far East and Japan. Mr Blum has long felt that JPMorgan is perhaps the last retail-orientated pan-European player with no representation on his menu. In fact, he has even become slightly frustrated that some of the partners Deutsche signed up have failed to deliver, not necessarily in terms of performance, but in terms of customer support and being there for his branch staff when required. This also includes publishing a simple set of easily digestible brochures and sales aids for flagship funds. Some of Deutsche’s partners, laments Mr Blum, are more used to servicing institutional mandates, requiring complex reporting on risk and performance evaluation. Even though Deutsche goes through a rigorous institutional-style fund selection process, with partners and funds chosen by a team supervised by PWM chief investment officer Klaus Martini, those partners who have failed to secure significant investment flows from retail clients only have themselves to blame, believes Mr Blum. “Some of our partners are simply not retail orientated,” says Mr Blum with a shake of the head. “They are institutionally focused. It is vital for product material to be readable from a private investor’s point off view, so that we do not have to translate it. All the other eight partners are still in place, there will not be any official stripping out. But there are some we work closer with.” For a group to have a decent share of client assets guided into its funds by Deutsche branch staff, it must have performance, adequate resources and an innovative spirit. “Do they have some superior funds in the recommended asset class?” Asks Mr Blum. “If not, then they may suffer a very boring time for two years. “What we offer to our strategic partners is direct access to our distribution,” says Mr Blum. “We overlook it and steer it, but we are allowing a stranger to talk to our advisers and also to have customer events. You need a face and stomach in retail and private banking, not just alpha and beta. The footoprint some companies have in Germany, Italy and Spain is not that strong, that they really research the end client.” After initial inflows of more than ?300m into Fidelity funds, some groups complained that their inflows have not even covered marketing expenses. Invesco was disappointed with inflows, but admitted that poor performance was to blame. But one strongly focused player in the institutional world privately complained that the deal has not matched expectations. Schroders manufactured an actively managed European defensive product for Deutsche at the end of last year, following an absolute return fixed income product built by UBS at the end of 2004. “This is where a partnership on paper becomes a real, living partnership,” enthuses Mr Blum. He says that the innovation of UBS and Schroders has won them privileged access to distribution staff previously reserved for internal managers at DWS. “They are doing more than just saying, at the end of the day, there is my product range, so put it on the shelf and do what you want with it,” suggests Mr Blum. “But joint development is still something special, it is not the normal way. We are not developing new products every day.” The idea is that guided architecture can create new money for a distributor, rather than just preserve market share. Deutsche believes that money invested with other banks has been attracted to absolute return concepts at Deutsche. But there is also a need for risk diversification in product management. For instance, Deutsche suffered hugely through withdrawals from its open-ended real estate fund at the end of 2005 and beginning of this year after valuation problems. Much of the time of branch advisers was devoted to client queries about this fund. Although Mr Blum would not comment on this area, it seems that Deutsche regrets not having offered similar real estate funds from its preferred providers. This would have diversified risk, and would have allowed advisers to shift worried clients into alternative funds, rather than risk losing the more disgruntled ones.

Blum: not a question of taking money from Deutsche Bank’s DWS