Private bankers, and the fund houses who try their hardest to enter into “consultative selling” partnerships with wealth management groups, are desperate to regain the trust of private clients which they lost during the crisis and through their exposure to excessive allocations of structured products, money market funds containing rogue, mortgage-backed assets and hedge funds exposed to Madoff and other questionable strategies.
“We are trying to position ourselves as a solution provider, tracking liabilities and arriving at optimal portfolio allocations for our clients,” confirms Leen Meijaard, head of international retail business at BlackRock, which since the purchase of BGI can provide active strategies, exchange traded funds (ETFs), hedge funds and private equity vehicles. Previously, the group had to buy in passive products from external parties, which was a harder case to present to distributors.
Combining strategies
“We can put together combinations of active and passive strategies, where we see a lot of interest right now. It’s a particularly efficient way to get emerging market exposure as quickly as possible,” comments Mr Meijaard.
His team has worked together with several different private banks to develop a model portfolio product using an iShares fund of funds, combining BlackRock’s asset allocation skills with passive exposure to underlying markets. “This is the direction in which the market is going,” says Mr Meiijard.
“It is definitely not a hype,” he adds, talking about the new policy of some private banks, including Holland’s Van Lanschot, to pass on asset manager commission rebates to their clients. He expects other Dutch institutions, including Rabobank to follow suit.
“They are moving to a model where the client pays the bank an advisory fee. Private and retail banks were previously reluctant to use ETFs, as there were no retrocessions attached,” explains Mr Meiijard.
This change to fee structures is part of a major rethink of private banking business models and how sound they are, according to Toby Pittaway, financial services partner at consultancy Oliver Wyman.
“It is no secret that nearly all private banks have been too margin driven. They have not been doing what is in the best interest of clients or they have been pushing clients into less suitable products,” says Mr Pittaway, who works closely with a number of wealth managers, trying to both improve their image in front of private clients and urgently address the problem of how to improve margins without selling risky products.
Currently, ‘boutique’ wealth managers have been taking advantage of the situation by suggesting to potential clients that only independent players can act in their best interests. Smaller advisers, such as Frontier Capital and 7IM, which use index-based products at the heart of low-cost, asset allocation-based portfolios, are also capturing the imagination of wealthy customers. Private clients are increasingly asking themselves why they should pay fees of up to 2.5 per cent to full service private banks, in addition to management fees to product providers, when the new breed of wealth managers charge closer to 1.5 per cent for allocation, transactions and administration, with almost negligible costs for running ETFs.
It is the job of Mr Pittaway to come up with ways the big boys can compete once more. One of the key routes which the banks have been advised to travel along is to emphasise their asset allocation capabilities. “A lot of people are talking about the importance of their asset allocation process. Some of this is clearly marketing rhetoric. But most banks are making the advisory process more institutionalised,” suggests Mr Pittaway.
“Rather than each adviser providing an allocation for their own clients, they are making it more systematic.”
However, he recognises it is tricky for larger institutions to establish a highly profitable, asset allocation-based offering, despite their public pronouncements. “This marks a big strategic change for suppliers of traditional packages,” warns Mr Pittaway. “They don’t want to reduce their pricing power, as the economics just don’t add up. But they see the smaller players coming in and taking away their customers, so they need to respond.”
Emerging market focus
One of the key recent changes in asset allocation thinking is that emerging markets, previously seen as a satellite asset class, has very much become the core of most private client portfolios. “Private clients are driven by recent performance. Certain asset classes like emerging markets are particularly attractive to them and yield-driven products like equity income have also proved quite popular,” he says.
“There is recognition that when we look at emerging economies in 20 or 30 years time, they will clearly be the core markets,” adds Mr Pittaway. “The news of Anthony Bolton and Fidelity launching a China fund is a good barometer of how far China has come.”
