Starting to see the benefit of open doors

Despite still relying heavily on their captive distribution networks, European asset managers have started acknowledging the benefits of open rchitecture, which, if not in the short term, are proving to show in the longer term. Speaking at the recent Business Excellence in Fund Management FT conference in Frankfurt Sebastian Klein, CEO at Cominvest admitted that Commerzbank’s pioneering decision to open up its doors to external providers in 2003 came to the German fund firm as a “very harsh shock”. “The good news is that open architecture, which is state of the art in private banking, will move to other segments like the affluent segment,” said Mr Klein. Expectations of further growth in third-party distribution contributed to endorse Cominvest’s decision to focus on its core competence areas, active European bonds and equities, he said. Philippe Collas, deputy CEO of the Société Générale (SG) Group and CEO of SG global investment management and services said that in 1996 SG asset management had E40bn equivalent in total assets; of these, 99 per cent were in mutual funds sold through its internal network. Ten years later, the French company runs E350bn, fifty per cent for institutional clients and 50 per cent for retail clients, of which only one fifth are managed for SG retail clients. “If you want to build a true asset management capacity, you have to open the doors and be able to compete with other providers. You can’t build a strong asset management company if you are working only with your own network, having the possibility to sell everything.” Having said that, Mr Collas emphasised the positive aspects of being a bank-owned asset manager, which proves particularly important in uncertain market conditions. “Bank-owned asset managers can count on the loyalty of retail clients to develop their business,” he said. “When times are difficult, [the internal network] has a cushion effect on outflows and for the time being that is pretty important.” Mr Collas reminded the audience that in Continental Europe the business is still in the hands of a few bank-owned asset managers. “I can’t see the end of the day for asset managers belonging to banks,” said Mr Collas. But the pressure is tougher than it was before and only those managers having a competitive advantage, strong performance, high profitability and excellence will survive, he said. “The old days of selling mutual funds and products without any capacity to bring added value have gone.” But the average cost of distribution in Europe, which is 60 per cent of the management fee, with peaks of 78 per cent in Spain and 68 per cent in Italy, gives away the pressure that banks can still successfully exert on asset managers. Although, in an ideal world, banks should select products based on their performance and not on the percentage of the management fee that manufacturers are willing to give up, it could be argued that this is not the case yet in Europe. This appears clearer when taking into account the cost of distribution in the US, which is just 40 per cent of the management fee, on average. “The European situation is not comparable to the US context,” said Naïm Abou-Jaoudé, chairman of the Executive Committee at Dexia Asset Management. Only 1 per cent of total assets under management in Europe are managed by independent players, versus around 30 per cent in North America. To this different structure echoes a different stage of development for open architecture. Today 80 per cent of the assets in the US market retail business are managed through third-party distribution versus 26 per cent in Europe, said Mr Abou-Jaoudé. “Banks are still hanging on to their asset manager in Europe and they don’t want to sell it because they believe there is a strong growth in this field; asset management also offers a valuable diversification in their banks’ portfolio,” he said. And while it is not clear whether the two US major banks, City and Merrill Lynch, by splitting their manufacturing arm from distribution started a industry wide trend, which Mr Abou-Jaoudé believes is “overplayed” in the US, what is sure is that in Europe the few examples of retail banks that have turned their backs on splitting manufacturing and distribution, such as WestLB, Commerzbank and Banca Intesa, make this trend just an abstract much talked-on solution. Things might change when Mifid, the Markets in Financial Instruments Directive starts kicking in. By requiring distributors to disclose what slice they get of the management fees investors pay, the new directive could bring some downward pressure on management fees. And this could encourage some banks that it is no longer worth keeping their fund management arms. Presentations from the Business Excellence in Fund Management conference can be viewed on ftglobalevents.com

Abou-Jaoudé: Banks hanging on