Schroders bids for number one distribution spot

Schroders, the ?180bn pan-European investment house, has entered the third phase of its strategic distribution plan, according to Gavin Ralston, who heads the group’s business expansion in Continental Europe and the Middle East. The first stage, implemented during the mid-1990s, was to get on the shelves of as many European banks as possible, starting with platforms of Italian institutions. This was followed by the culling of unprofitable partnerships, while concentrating on deepening ties with selected groups, able to drive business flows, explains Mr Ralston, a long-standing servant of Schroders, who has been at the London-based funds house for more than 25 years. The third and latest stage of Schroders’ development involves targeting not just fund selectors in the head offices of European banks, but also their branch managers in the regions, with marketing initiatives also feeding through to the man on the street, says Mr Ralston. “We are in a new phase, where we are getting close to the end customer,” he says. “A large proportion of our assets in Europe are managed on behalf of professional fund selectors, such as fund of funds managers. But there is another part of the market we haven’t significantly tapped yet. This includes people buying individual funds, and needs a different kind of sales approach. “This requires us not just to interact with the guys at the centre, but those in branches of the network. It also means customers need to be familiar with the Schroders’ brand – and in Europe, they are not as familiar with it as they are in the UK. We still have a lot of work to do here. To shift from wholesale to retail distribution in Europe is our third phase.” A clear path If this move can be achieved successfully, then there is nothing to stand in Schroders’ path towards its aim of eventual European domination: “There are no barriers to us being the number one funds seller in Europe if we have the right products and the have the right distribution coverage to get to the customer,” states Mr Ralston confidently. What he is saying, in essence, is that institutional groups such as Schroders can be very successful just targeting intermediary institutions, but the business will be confined to the funds of funds arena, if that is the only approach they take. In order to achieve success in the guided architecture world, pioneered by the likes of Commerzbank, Deutsche Bank and ABN Amro – where a bank normally links with between five and eight strategic partners – it is not enough just to have a preferred partnership agreement. Many preferred partners are only beginning to realise this, two years into their agreement, with very little in funds to show. What Mr Ralston has known for some time, and demonstrated in co-operation on specific products, leading to significant sales through the Deutsche Bank branch network, in a push co-ordinated by Martin Theisinger’s German team, is that validation from a head office in Frankfurt is just the beginning. A defensive European equity fund specially modified for Deutsche customers, boasts assets of more than e400m. To really benefit from a relationship, a distribution leader needs to make sure their group’s staff are getting out to regional offices in Bavaria and Westphalia, and that the customers in the provinces are aware of the brand. Even if the product is suggested to them, customers still have the final choice of whether to buy it or not. “This is also what distributors want,” believes Mr Ralston. “They need a narrower list of preferred partners and they want that kind of R&D to develop preferred products. Deutsche let us into their branch networks, and they have been keen that we get feedback from their branches, but others are more reluctant.” It is far trickier to develop effective partnerships with those banks which only allow manufacturers to have contact with fund selectors in the head office. “It is more difficult to develop specific products for those organisations that don’t give us this degree of access,” says Mr Ralston. “We don’t get a feel of the full product range on offer, and then have to rely on the guys in the centre to identify the gaps.” This is the key area in which the relationship between fund manager and distributor has changed during the last decade. “Rather than just picking the best products, it’s now also about finding the gaps in the product range, and developing a product to fill the gap for customers. We are now doing this for our distributors,” says Mr Ralston. As well as the relationship with Deutsche, more recent developments have led to a strengthening link with Citibank, for whose private clients in Germany, Greece, Italy and the UK Schroders is now running multi-manager portfolios investing in assets including private equity and hedge funds. This European deal builds on an existing agreement in Latin America, where Schroders has been running multi-manager solutions for Citibank since 2003. There is also a link-up with Spanish bank BBVA in Madrid, to take advantage of Spain’s more progressive initiatives regarding hedge fund regulation. “We have co-operation with BBVA to distribute our retail products in Spain, but regulations elsewhere are not ready for hedge funds to be distributed to retail customers.” However, a relationship with HSBC aimed to exploit depolarisation regulations, which will allow banks in the UK to sell products from a limited number of partners, has been slow to bear fruit. “HSBC selected Schroders, but we haven’t seen significant flows from the bank this year,” reflects Mr Ralston. “In the UK, banks are struggling to sell the concept of investing in a way that has not been the case in Europe. There is not yet a huge amount of appetite among their customers for retail products.” Hold on the market This is in stark comparison to Continental Europe, “where the natural place to buy a mutual fund is a bank. That is still not the case in the UK, where IFAs have a hold on the market. Banks need to invest more in promoting mutual funds to their customers,” believes Mr Ralston. He expects this to happen through a hybrid model, where advisers increasingly attach themselves to the larger retail banks. “The way Continental European banks operate, providers of advice are sitting in the building, playing the role that IFAs traditionally played in the UK,” he says. Despite the slowness of some of these expected structural changes, Schroders has had a good year from the UK retail market place, with business sourced from IFAs, portfolio managers and stockbrokers, rather than banks. Equity-based products such as Schroder UK Mid 250, Schroder UK Alpha+ and Income Maximiser have all had good take-up in the UK adviser market. But the development of IFA platforms is yet to match the hype surrounding them. “Platforms are becoming more important,” reflects Mr Ralston. “But the extent to which they have become manager selection vehicles rather than administration platforms is still limited. It is happening, but like depolarisation, quite slowly.”