While some wealth management groups and fund houses are battening down the hatches, tinkering with the odd product and hoping the financial crisis goes away, others are asking serious questions: how should we react to this current state of events? How should we change the way we do business with private clients? How can we actually profit from the circumstances we are faced with?
Rather than concentrating on products, which most banks have done, and losing money for clients, it is important for providers to move to service driven models, with different propositions for platinum, gold, silver and bronze segments, says Amin Rajan, chief executive of Create-Research who works with large private banks on customer-facing propositions.
“What our research shows, is that despite the bad performance of the last two years, you still have a 70 per cent chance of retaining the client if you can provide good service,” volunteers Professor Rajan. “The benefits of this for fund managers and private banks are very clear.”
The key is to make sure clients get a better service as they are upgraded to the next level. “Lloyds TSB’s wealth management division was upgrading people from the retail bank to the private bank and they made you feel so good, that you had become a gold category client,” he says. “But you were not getting anything in return, and when clients realised this, they wanted to go back to branch banking.”
The sheer scale of losses in private banking, driven by the current crisis, means most institutions are ready to change this supply-driven business model. Banks are realising that unless they can attract a new generation of “buy and hold” investors, the industry has little future, claims the Professor. The generation which forfeited investments during the dotcom bubble has already been lost to private banking, he believes.
One of the problems is that products have too many “bells and whistles” of dubious benefit to either clients or product manufacturers. “Very few businesses can survive a 40 per cent trop in gross revenue – they will blow up. For a fund manager to survive, they will need robust, variable cost models, where costs rise and fall with income. Having a lot of products does not give you the resilience to cope with the feast and famine cycles we are experiencing.”
Following Create’s latest study, Professor Rajan is proposing a wholesale rationalisation of funds, freezing base pay and making bonuses a larger amount of remuneration packages.
Product development
This is not necessarily a model followed by the whole industry. Aberdeen Asset Management, which is poised to take over much of Credit Suisse’s funds division, sees an opportunity to build products to fill more niches rather than rationalise its range. “If we take Asia as an example, and we have a mainstream Asia Pacific fund, this allows us to develop into more specialist areas such as China, India and Asia small cap funds,” says Gary Marhsall, Aberdeen’s head of collective funds. He sees the merger as an opportunity to launch new funds over time, and speed up the existing process of product development.
“The more you can offer in an asset allocation process, the more chance clients want these funds in some part of the cycle,” states Mr Marshall, proposing a radically different business model to the one championed by Professor Rajan.
“Private banks tend to look for a range of different funds they can switch money between,” says Mr Marshall. “You can take the Schroders approach and rationalise, or you can take ours: we have the infrastructure, now we must try and put some more revenue through it.”
At Goldman Sachs Asset Management, the planned response is to expand distribution activity, rather than product ranges, with global distributors and the German market identified as the premier areas of focus. “We are already Europe’s number one sub-adviser. We would also like to be a top five player in mutual funds over the next five years,” says Nick Phillips, head of third party distribution for Emea at GSAM. He names JP Morgan, Schroders and BlackRock as his key protagonists in Europe. “Germany has more cross-border mutual fund assets than any other country in Europe,” he says, explaining the renewed Teutonic focus. “Our distributors are telling us that our competitors there are retrenching, and that coverage was not as good as it was, so this crisis presents a significant opportunity for us.”
The majority of distributors in Germany use a “guided architecture” approach, which makes it relatively easier for companies on a select panel to acquire assets, believes Mr Phillips, who has laid down a plan to cover not only the German banks’ head offices, but also to provide regional coverage at bank branch level. “This is out first significant step into more retail mutual funds distribution,” he adds.
