Building partnerships between fund houses and distributors

“Choice is good, but too much choice can be paralysing,” as David Schofield, president of Intech Investment Management once said.

This, in a nutshell, summarises the debate between closed, open or guided architecture in the fund distribution business. But no matter what model a distributor chooses, there are a number of core principles and practices which can be applied.

From the outset, the key question is how broad a guided architecture programme should be? How many managers should a distributor be looking to have a preferred relationship with? There is no steadfast rule on the optimal number of fund houses to include, although the current trend is to go with between six and eight managers. But several factors need to be taken into consideration before private banks make that decision:

• The distributor must find a balance between keeping a limited number of fund managers while being able to offer enough funds across a broad spectrum of asset classes.

• A key component is the client service model in place and the promise to the clients and bankers. What are the core pillars of the service model? Should clients and bankers be able to choose investment options from a broad selection of funds? Or would it be better to give them a narrower choice, based on a rigorous and reliable selection process?

• Bankers and financial advisors need to be educated to such a level that they possess  sufficent knowledge of  each firm and their products when they talk to their clients. Training and access to the network are key to building this know-how, but this must be well organised and coordinated efficiently to avoid “overload” and any unnecessary distractions to the network.

• When looking at potential flows by asset class, can each manager expect a respectable share of wallet and can they achieve their revenues and profitability targets, which are usually very divergent?

Selection criteria

A number of interrelated factors come into play when choosing fund houses for a guided architecture model.

First, a close look at the client base and current product usage will lead to a certain type of fund houses. For instance, with an older client base, who are likely to be more conservative and heavily biased towards fixed income solutions, one may want to shy away from fund houses with strong capabilities in alternative products, which will be more challenging for the clients to understand and invest in.

The views from the in-house investment strategy team is another important component. A portfolio of fund houses with broad enough product ranges and complementary investment strategies may be mandatory. This will allow the asset allocation strategy  to be implemented and offer the most suitable solutions the clients need to take advantage of the investment calls.

Support infrastructure, in terms of sales and account management as well as marketing communications, is paramount, especially with increasing demands from distribution networks and clients. Being easy to work with, keeping bankers informed in a timely manner, providing good quality and insightful material and solving issues in a hassle free way are crucial elements to consider during the selection process.

Finally, brand is extremely important to both clients and bankers. Having a good reputation as an expert in their field, with solid local knowledge, as well as being well known by clients and having funds that offer interesting stories can all help fund houses to become more successful. Fund houses and distributors need to establish a different kind of dialogue between them in order to create an environment where both sides can build a long-term strategic relationship.

Works both ways

Full transparency from both sides is essential. Just as we, as distributors, expect fund managers to provide the information we need to better understand their products, fund houses also need to know more about our particular businesses: the strategic direction we are taking; our views on the markets and where we think our clients should allocate their money; the reasons behind our decisions to include or withdraw a product from our recommendation lists.

This requires on going and clear communication as well as the opportunity for feedback from both sides. It is about sharing expertise and knowledge . This will enhance the ability for both to rapidly translate market opportunities into effective product propositions to the clients in an environment of increasingly rapid changes in the financial markets and in client demands.

Last but not least, like any long-term relationship, both distributors and fund houses need time and patience to be genuinely successful.  

Jean-Francois Hautemulle, Head of fund Selection, UniCredit Private Banking