Deutsche’s ‘third pillar’ restarts German offering

There is nothing luxurious about the offices of Deutsche Bank’s product creation headquarters on the edge of Frankfurt, close to the city’s futuristic Messe exhibition centre.

There are no comfortable sofas or collections of obscure modern art ubiquitous to most private banking and asset management premises. Clients rarely set foot in this factory facility, overlooking a flyover in the bleak, post-industrial hinterland of Germany’s financial capital. This is the factory approach favoured by Rainer Neske, boss of the German powerhouse’s commercial banking division, tipped by many observers to eventually lead the bank.

His key lieutenant in charge of product design for Private and Business Clients (PBC) is Dominic Blum, one of the pioneers of so-called ‘guided architecture’ in Europe, who controversially recruited eight external fund houses, in addition to in-house provider DWS, to supply financial products to the bank’s 8m customers back in 2003.

Today, following the recent majority stake acquisition in the retail Postbank operation, the number of clients serviced by Mr Blum’s product factory has swelled to nearer 24m, including customers in Asia and Eastern and Southern Europe. In terms of sourcing and building products for private and retail banking customers, he is certainly one of the industry’s most powerful figures.

The Postbank acquisition has given Deutsche Bank the kind of influence in managing assets of retail and private clients that its staff could only dream about 10 years ago. Mr Blum describes his operation as the “third pillar” of the banking business in Germany, alongside the co-operative banks and the sparkassen savings banks. Previously Deutsche Bank PBC had a high profile and big brand, reflecting regular media coverage of the group’s CEO Josef Ackermann, but was in reality a bit-part player in the mass market.

“In retail and private banking, if we talk about really successful institutions, there were only two banks in Germany: Deutsche and Postbank. Now we are both together, so we are a more serious player,” smiles Mr Blum, choosing to ignore the merged Commerz-Dresdner franchise, which serves just 4m customers, but was once considered Deutsche’s cut-throat local rival.

Product Overhaul

During the three years since the crisis hit German banking hard, Mr Blum’s team has followed Mr Neske’s lead of diversifying the branch network into countries including Poland, Spain, Portugal, Belgium, Italy and further afield into India and China. But closer to home, the entire product offering has been stripped down and re-tuned.

“Our target has not been to combine our propositions in Germany, but to reshape them,” says Mr Blum, who reports client assets now back to pre-crisis levels, after a strong turnaround in 2010. Assets invested by PBC clients totalled E306bn, when last counted at the end of 2010.

There is an admission at Deutsche Bank that products and portfolios for private and business clients were not managed and sold correctly in the past, but that the operation has recently clicked, with competitors still yet to address these problems.

While contact between advisers and clients suffered post 2008, a relationship remained, believes Mr Blum. But the once strong link between advisers and product producers had deteriorated. “During the crisis, the link between adviser and central product provider was weakened. There was silence and very much mistrust. That dialogue needed to be restarted.”

In addition, Deutsche, along with other German players, was combating a public perception of banks, which had lost assets of wealthy clients after the Lehman collapse and temporarily closed supposedly liquid real estate funds, blocking customers’ rights to access their own cash. “Yes, we got this message from the public. Maybe some producers haven’t focused enough on liquidity and transparency in the past and also did not take enough care of the combined risk of a portfolio.”

The restart button was pressed in 2009, rebuilding relationships between customers, branch staff and product producers, with Mr Neske’s new motto of “a fair share for the customer” ringing in advisers’ ears. “It can’t be right if the branch staff earns a share of the deal with nothing for the customer,” says Mr Blum. “Our new maxim is that if the customer earns money, the distribution earns money.”

The product brains in Mr Blum’s team have shifted to producing “coupon oriented” equity and bond-based products paying a regular dividend to private clients, a huge leap from the previous mentality of choosing top-performing funds of the month, which could be frequently traded.

This move from recommending individual funds to constructing portfolios containing 30 to 40 mutual funds for specific clients, with a fixed maturity and “indicative coupon,” marks a sea-change from brokerage to portfolio management.

The pursuit of regular yields of 3 to 5 per cent was previously achieved by exposure to Deutsche’s real estate funds. While there is still some emphasis on this area, plagued by periodic scandals and liquidity problems, Mr Blum claims to be concentrating on using those funds which have proved their liquidity and quality during the crisis.

Another innovation is the monitoring of performance of customers’ portfolios, against the old way of selling them the fund and hoping for the best, with portfolio construction now guided by a chief investment officer appointed specifically to make calls for the PBC division.

“We have clear market calls in developed as well as emerging markets, especially the US,” says Mr Blum, with European equities also currently overweight. “Right now, emerging market equity is not our most aggressive call.”

Dominic Blum, Deutsche Bank