Less is more for private banks picking product providers

The news that yet another global private bank, HSBC Private Bank, has chosen to partner with a small number of strategic asset managers is testament to the rise of this approach. 

The ability to negotiate better fees and reduce due diligence burden are key growth drivers, both in Europe and Asia, says Beverley Sharp, global head of retail research at Mercer.

Also, with upcoming MiFid 2 regulation, distributors will no longer be able to benefit from fee rebates and are looking for ways to improve margins, she says.

The preferred partner model tends to favour larger firms with a broad product offering, who are able to work closely with distributors in serving clients. 

“We will have a selection of partners we work very closely with, but we will still retain the option of working with providers outside that number to meet client requirements,” points out Jean-Christophe Gerard, global head of investment products at HSBC Private Banking. 

HSBC’s new strategic partnership approach, still in a development phase, will take effect from the second quarter of this year. The number of partners and funds covered will be determined by clients’ requirements. “Our criteria for choosing strategic partners is based on how their offering aligns with our clients’ needs,” explains Mr Gerard.

 “Brand is not a factor that we consider explicitly in our analysis; we have a proprietary quantitative and qualitative approach,” he says. “Of course some managers have very strong capabilities in particular asset classes that drives their brand.”

The adoption of this approach follows last year’s centralisation of the private bank’s fund selection team – operating from Geneva, London, Monaco and Hong Kong – into one global hub in London. 

According to the bank, the move was part of the creation of a new global product hub across all the private bank’s global propositions to ensure the delivery of a more “consistent service to clients globally, and improve co-ordination across asset classes”. The global team also works with local product specialists in individual markets.

 “For some wealth managers, providing outstanding open architecture may be a differentiating a factor, part of their DNA, but for the large majority it is not,” states Laurent Auchlin, formerly in charge of  manager selection at both Lombard Odier and  Credit Suisse.

Fund selection, without the huge retrocessions of the past, is just a cost, he says.  “And frankly in Europe, with five big asset managers you can cover all asset classes with good enough results.”

But private banks are unwilling to admit the role of brand and product range in driving fund selection, as it would show they are not adding value to clients and are not any different from competitors. “Private banks may say they select funds based on multiple criteria, but the truth is they do not select boutiques or newly established firms,” believes Mr Auchlin, who left Credit Suisse last year, after the new managed account programme for UHNW clients, in which he headed the selection of external active asset managers, was controversially shut, just seven months after launch.

In this environment, the trend is towards outsourcing fund selection and administration activities, in particular to meet demand for smaller players. In January this year, to tap this demand, Credit Suisse made its fund platform InvestLab available to third-party distributors, which until last year was operating as Fund Lab, serving more than SF100bn ($99bn) of assets with a focus on internal clients. 

Positioned as the “B2B open-architecture platform that links distributors and fund providers in Europe,” it is the continent’s third largest, after Allfunds and UBS Fondcenter.

The platform offers fund research and services, which range from database infrastructure for delivery of data, solutions for regulatory compliance MiFID II, provider and distributor contract management to value-add reporting.

“Increasing regulatory requirements and persistent cost pressure create demand for large-scale one-stop platform solutions offering a wide range of services,” says Joerg Grossman, chief executive officer of CS InvestLab. 

“For instance, due to cost pressure, small banks have fewer resources to dedicate to fund selection and are increasingly looking to outsource this function.” 

New boutique companies are also emerging in this space. Former head of fund selection at HSBC Private Bank in Geneva, Hervé Croset, following the restructuring of the group’s international fund selection units, launched Wealth Solutions Partners, based in Geneva. 

The aim is to provide independent fund selection and advisory services to wealth managers, including private banks.