Twisting an arm to your point of view

Coming up with economic themes and translating them into viable structures are the first two steps in the chain of investment product generation. Most chief investment officers, who are talented economists, have no problems in drawing up the theories, which come from many years of studying markets.

And innovative product development teams, who must take advantage of new product rules such as the European Ucits III regulations, and keep up-to-date with changing product structures, should be able to construct industrial solutions, to turn these theories into practice.

The third step, however, is much more difficult to implement, as it concerns more impenetrable, psychological aspects of the product creation and development process. How do you persuade your client advisers about the relevance of a theme and that a particular product structure is relevant to them? In short, how do you convince them to sell products that will boost your bank’s bottom line?

“Whether the advisers listen to a centralised product creation team depends on the bank,” believes Pierre Mathé, CEO for private banking at French giant Société Générale, running ?60bn on behalf of wealthy individuals.

“There are a lot of banks within which a private banking division can make a strong recommendation to clients, but the advisers are not obliged to follow the investment strategy of the private banking group, or the fund selections done by the group.

“The problem for these institutions is that perhaps they have not set up a strong centre of expertise in terms of product, that they do not have an intelligent and wholly competent centre of expertise within private banking,” says Mr Mathé.

Close to home

It is tempting for the large cross border players to centralise their asset and product selection solutions within their asset management arms, rather than within the private client or wealth management unit, believes Mr Mathé. This can mean advisers and clients become suspicious of politically or commercially motivated choices of funds, whereas private banks can only really serve clients if they make a totally independent choice of products.

“We could say to our in-house firm SGAM, for instance: ‘Give us your selection of funds’, but this would not be independent enough,” suggests Mr Mathé. “We need to reassure the client that the expertise they are being offered is not that of the group, but of the private banking area. This is very original, as in the industrial mindset, the natural solution would be to have a unique centre of expertise for the whole asset management area.”

SG’s private banking division is unusual among its peer group in that less than 6 per cent of assets are managed by its sister asset management company. Would it not be more profitable for the bank to have closer to 30 per cent of products managed internally? “Perhaps we could have 10 per cent of SGAM products and all of our structured products coming from the group, but I am sure this would be more of a hardship for us than an advantage,” answers Mr Mathé. His belief is that the private banking unit’s profitability is driven not by industrial manufacturing and distribution of in-house products, but through offering a totally independent range of solutions based on true open architecture principles.

Strong positioning

“This gives us a very strong positioning, and a lot of clients are surprised, as they know that SGAM and SG’s corporate and investment banking division have very strong, innovative products,” says Mr Mathé. “They are astonished that we can propose other types of products from other competitors. This gives a lot of confidence to clients.”

But this idealistic-sounding approach soon gives way to a pragmatic business sense. “Clients get access to strong, very innovative product lines, and at the end of the day, they want to do more business with us.”

This desire to transact business, after a long, worthy and detailed advisory process is also at the heart of the policy at Credit Suisse, although Burkhard Varnholt, the bank’s Zurich-based head of product creation, achieves his goals with a very different, more persuasive approach.

“I communicate my thoughts to advisers by writing, by being on the road constantly, by e-mailing my thoughts to them,” says Mr Varnholt, who is responsible for the training and education of 3,000 client advisers at the bank, and supervising a 130-strong product creation and development team.

“I travel all the time, but there is no typical week, although 70 per cent of time is spent with advisers and clients.”

Slightly different approaches are needed to persuade both clients and advisers to make the “right” decisions in terms of product choices, believes Mr Varnholt, who says that advisers need to understand the technicalities of product structures, while clients need advice on markets and allocating assets.

“In 2002-03, there were a lot of depressed feelings around, where clients had suffered a very sobering experience,” says Mr Varnholt, painting a picture of the relations that exist between advisers, clients and product creation specialists. “Now the global risk appetite is at peak levels again. This appetite is an indicator of the mass psychology of risk. If an investor is hopeful, he is much more likely to be a fund investor, but a sceptical investor will always prefer a structured derivative.”

Competitive edge

However, Mr Varnholt says that the margins in structured product creation, which he himself has said have helped drive profitability at Credit Suisse, can often be vastly exaggerated. “The way this business has developed is so competitive these days, that there isn’t as much margin in structured products as is frequently mis-perceived and represented.

“Credit Suisse is more profitable than other banks, not because the products are more expensive, but because they are more competitive. We attribute our success to the focused client advisory process. The better you advise your clients, the more successful you are. Although there is no publicly available data, even if we do sell more [structured products], it’s down to the advisory process. If you can advise clients well, you will get a bigger share of their wallet.”

‘We tell our guys we are giving them the best in the market, in addition to what we do. We are assembling different products from different regions and classes, to weather storms, when they occur’ - Roland Lescure, chief investment officer for Natexis Asset Management

While he does not see himself as a motivator, as he feels his work can only be effective if advisers gain his team’s trust, Mr Varnholt does not shy away from the “enforcer” tag applied to him by internal staff and some external competitors.

“We get e-mails from Burkhard every week, mainly about which structured products we should be selling,” says one German-based adviser for the bank. “They are very persuasive and well researched. At the end of the day, we use them in an advisory capacity, and there is no compulsion for us to sell what he tells us. But everybody has a lot of respect for Burkhard, so we usually follow what he recommends.”

However, unlike his counterparts at SocGen, Mr Varnholt does reveal some bias for internally packaged products. “If we can do it in-house, we will, as every time you go outside, you increase transaction costs.”

At Natexis Asset Management in Paris, chief investment officer Roland Lescure admits that creating products for his group’s branch network, Natexis Banques Populaires, and persuading them to sell the products, is one of the key challenges he faces. And he has decided to tackle this by selling a mixture of both internally and externally manufactured products.

“When we talk to our retail networks, we are talking about our ability to assemble products,” says Mr Lescure. “Each block is excellent in its own right, but together, they provide a super solution. We tell our guys we are giving them the best in the market, in addition to what we do. We are assembling different products from different regions and classes, to weather storms, when they occur. It is a well-balanced, well-diversified approach, involving tactical asset allocation.

“Then we need to concentrate on information and communication, to make sure that people understand exactly what we are doing.”

The bigger French asset managers, however, play down their reliance on pushing products through either compliant or sceptical retail networks. “The retail banking network is not our most important client,” says Vincent Camerlynk, head of global business development at BNP Paribas Asset Management. “Over the medium term, retail banks may move to a slightly more open architecture than today. And we have to be always viewed as more of a preferred provider, and to give full attention to our retail network.”

Safety first

It is also difficult to communicate more sophisticated concepts to retail clients, who may prefer safety-first guaranteed funds, believes Jerome de Dax, head of global distribution at SG Asset Management.

“What retail investors are looking for are products which are easier to understand on a concept basis and able to deliver decent returns over a period of time.

This means some of our brightest ideas are not always so successful.”

But many cross-border players are clearly investing much more time and money in relationships with key external banking networks and their clients.

‘You have to start with a bank’s central headquarters for their fund selection process. The HQ gives you some rules about what you can and cannot do. If you play by the rules, then you are invited to support the regions’ - Achim Küssner, head of Germany, Merrill Lynch Investment management

Merrill Lynch Investment Managers, which has distribution partnerships with both Deutsche Bank and Deka in Germany, has recently switched its strategy from trying to add its funds to multi-manager platforms, to getting its core products pumped through as many bank branches as possible.

This has meant striking an initial relationship with the bank’s head office, before the real work is done in the regions, with branch staff and their clients. “It’s nice to have counterparts and contacts in Frankfurt, but the business decisions and majority of fund sales have really happened in the regions,” says Achim Küssner, MLIM’s head of Germany, who spends most of his time on the road in discussions with regional banking staff.

Big guns

“You have to start with a bank’s central headquarters for their fund selection process. The HQ gives you some rules about what you can and cannot do. If you play by the rules, then you are invited to support the regions,” says Mr Küssner.

Typically, Merrill may be invited to send a speaker specialising in commodities to an event for bank staff and clients in Berlin. “External speakers are always accepted to a greater degree than the bank’s internal people,” he believes. “The whole story is of more interest then.”

Big banking clients, such as Deutsche, with which MLIM does business in Europe, Asia and the US are given red carpet treatment under Merrill’s ‘Platinum Account’ programme.

Workshops are held to present market trends and educate advisers abut products, with input from Merrill’s private banking network in the US and senior management from London. “For these people, we bring in the big guns,” says Mr Küssner.