There has been much anecdotal evidence suggesting banks have closed their shelves to outside providers following the financial crisis, preferring to manufacture funds in-house and keep any profit to themselves. At the same time there are fund groups – whose future lies in distributing products through third parties – who swear the open architecture model is alive and kicking. So what is the truth about the current relationship between fund provider and distributor? And is it just a case of manufacturers needed to fine-tune their models in order to be a success?
According to the fund houses, which have teams allocated to servicing key clients in both local retail banks and global distributors, there has definitely been a change of climate. “In Europe, open architecture is dying and it is very difficult to sell funds to banks,” admits Richard Garland, head of distribution at Investec Asset Management for the Emea region.
A convenient solution
He sees banks and insurance companies choosing one or two groups to whom they now delegate large mandates and believes the sub-advisory model, while convenient for the bank, may not always be in the customer’s best interests. “This is a real threat to open architecture,” says Mr Garland.
Investec has tweaked its model in Europe and gone with the flow. Across Switzerland, France and Luxembourg, Mr Garland’s teams now target the fund of funds operations, rather than retail banking groups. The one-off E1.2bn sub-advisory mandate secured with Austria’s Raiffeisen – encompassing global equity, US equity and Pacific equity classes – is now much more typical than the regular annual flows of E200m, which big brand fund groups used to garner from securing a berth with a guided architecture-led retail bank five years ago.
That does not mean so-called “global distributors”, with branch networks in several countries, are no longer targeted. Investec does this by selling specialist products investing in sectors including energy, commodities and Africa. “You need something special, then the door opens that bit easier for you,” claims Mr Garland.
Even though he believes banks such as Deutsche in Germany, whose partnership agreements span networks in Belgium, Poland and Spain, can be worth pursuing and are likely to sign with Investec, he remains to be convinced whether they will drive business in the long run.
Losing faith
In fact some marketers actually believe private clients and retail customers are now turning their backs on the previous system, where they demanded a palate of top-performing household name funds. The reason is simple: customers have lost more money in the crisis, often by subscribing to the latest ‘big idea’ funds, than in previous dips and no longer trust the sales spiel.
“We don’t feel there is currently any bottom-up demand for open architecture in the Belgian market,” relates Kristel Cools, head of distribution partners in Brussels for Fortis Investments. She believes that working with a proprietary funds house gives both bank and customer a much better idea of what is actually inside a product, particularly when transparency and simplicity are the order of the day.
“There have been no strategic decisions made by big financial institutions to go back to proprietary products,” says Fred Van der Stappen, head of sales for Schroders in Benelux. Rather the decision was made for them by the credit crunch and the subsequent recession, he adds. The disastrous state of some local banks, and uncertainty spurred by changing ownerships at ABN Amro and Fortis has also made the job of distributing funds a more complex one.
However, the belief among sales staff at fund houses is that as soon as a bull market resumes, banks will relax their criteria and allow more outside partners through the doors, in a bid to sell more funds once customers regain confidence.
Many remember the situation – quite typical across Europe – back in 2002, when ABN Amro broke the Dutch mould by beginning to select a handful of external funds for retail banking clients. ING and Rabobank gradually followed the model. “It’s like when one bank raises interest rates for savers,” says Mr van der Stappen.
“What do you do – wait and see or anticipate? For the end client it is always better to have a choice of different suppliers,” he explains.
The German situation
According to Joerg Brock (see box, page 14), the man credited with bringing open architecture to the retail banking market, now working for Dresdner Bank as head of private client portfolio management, German banks are increasingly concentrating on selling in-house funds in order to boost balance sheets, with customers not given any real choice.
