Reflecting the move towards open architecture, distribution platforms are becoming an increasingly important way for managers to gain access to a large number of assets. Nick Fitzpatrick reports ...
Like many asset managers, HSBC Investments is seeking to strengthen its links with private banks and retail banks that distribute products from third-party investment houses. A slot on a large distribution platform of the sort offered by Credit Suisse or Citi Private Bank is not easy to come by – but they offer the keys to a vast number of assets.
The value of Citi Private Bank, for example, is that it offers access to Citi Smith Barney, which provides financial advice to high earners, and to Quilter, Citi’s other private wealth business. Citi’s extensive retail branches can also be tapped into.
In their enthusiasm for access to distribution, asset managers can overwhelm distributors with ideas. On Citi Private Bank’s wealth hub there are 25 global investment houses and 16 independent boutique firms, but plenty more would like to be on it.
With a vast pool of clients, including some of the wealthiest, it makes sense, therefore, for a firm like HSBC Investments to give extra focus to its relationships with distributors. To do this, the business created a head of global distribution role and announced last month the appointment of Deepak Sathe. His brief is to develop and manage relationships with top-tier global and multinational distributors of third-party asset management products, including private banks, insurers, retail banks and asset managers.
The creation of this role is just one of a number of similar moves by asset managers in recent times as they seek to sell their products through third-party distributors as well as, or instead of, selling their own products directly to end clients.
Putnam Investments, an institutional-focused manager, recently created a new role for a head of global consultant relationships in London, appointing Jenny S. Morton, who already worked at the firm in a similar capacity. Insight Investments recently moved Sarah Aitken, formally head of institutional business, to head up its distribution activity. Insight created the role in 2005.
Moves such as these reflect the move to open architecture and point to the growing power of distributors that has resulted from it. Distributors, too, are still adapting to open architecture and private banks are expanding their manager research capabilities to handle the flow of ideas pitched at them by asset managers.
What’s in a name?
HSBC Investments is lucky in that it already sits on platforms operated by large banks such as Credit Suisse and UBS, among others.
“Third-party distribution is very important for us and we have local teams involved in this in 30 countries around the world,” says Farley Thomas, global head of wholesale at HSBC Investments, who Sathe reports to.
The HSBC name helped it get there, acknowledges Thomas, who helped take the business on to Credit Suisse’s platform in the late 1990s. “When we first set up with Credit Suisse they wanted us on the platform because we were HSBC, a well-known brand, and because we had an interesting range of funds,” he says.
But what chance for the less well-known firms?
Given its use of 16 independent boutiques, Citi Private Bank is clearly receptive and so too is Credit Suisse Fund Lab, which has expanded its asset manager menu from 18 providers since its 1999 launch to 68.
Erich Lang, who looks after relationships with fund providers at Credit Suisse, says: “We have 68 third-party fund providers on our Credit Suisse Fund Lab. We are constantly expanding our universe and are in contact with many financial institutions and negotiate the possibility to include them on the platform. Every year we conduct negotiations with up to 100 companies that would like to be included on the platform. We welcome up to ten new providers each year.”
There is a perception among some smaller asset managers that certain platforms prejudice them because of their size. “They like large managers because it is thought that they will be better placed to weather bad market conditions better,” says one.
Although this is not always the case, only fund managers of a certain size are permitted to Fund Lab. Lang says: “Credit Suisse has managed [its] expansion by applying qualitative and quantitative criteria. Only fund providers of a certain size are admitted to the Fund Lab internet platform: at present the minimum requirement is a range of five funds.”
He adds: “Fund Lab was established for retail clients but is widely used by institutions too. We are not focused on a single product type or client segment. Fund Lab is open for every investor globally.
Thomas, at HSBC Investments, believes that size is not always a key factor. “If you have an interesting product the platforms will look at you. I do not think it’s all about size.” This is a view confirmed by Alex Marshall-Tate, head of fund manager selection at Citi Private Bank, who says: “We welcome boutiques because asset allocation has become more complex and boutiques are often best in providing deep knowledge of a particular area of the market, combined with a true focus and expertise in their chosen area.”
Thomas adds: “The platforms are also looking for competitive pricing as well as some kind of ‘wow factor’, which we have with our emerging markets funds.
“You also have to be able to deliver good connectivity and follow it all up with client service.”
Thomas says that, increasingly, distributors also want “seamless management of their worldwide relationships with product managers”. This partly led to the creation of the new distribution role at HSBC Investments.
Lang, at Credit Suisse, says that regular reporting is a requirement of the bank, along with other data to ensure transparency and comparability.
Thomas says the major platforms have made substantial investments in technology and offer managers a good way to gather assets. This is recognised and distributors will typically be given a share of annual management fees.
A small success
Getting on to a platform is all well and good. But it is then a case of competing against other funds on that platform. It can still, therefore, be difficult to gather assets.
Platforms come in all shapes and sizes. Some, which offer financial advice and discretionary trading like Citi and Credit Suisse, may actively market a manager, while others may simply offer a connection to financial advisers. P-Solve Alternative Investments, a London-based hedge fund of funds manager, managed to place three of its funds onto FundSettle, a platform operated by Euroclear which offers connectivity to a large array of advisers, recently. For P-Solve this means that institutional and non-institutional investors throughout Europe can trade the funds electronically.
Polly Smith, sales director at P-Solve, says: “Being approved for a platform is one thing, but being bought is another. This is why having an investor [that is already a user of the plarform] is good."
The platform won’t generally do any marketing for you as such, but they are not there as a marketing function anyway. They are non-proactive distributors. As asset managers you still have to make your funds available and let people know what platforms you are using.“
However, some of the platforms will let you into their core universe, where you may get some marketing in return for sharing some of the management fee with them. In some cases this could mean that the universe of fund managers goes down from 12,000 to 7,000.
“Some of the bigger platforms have a third group where they make their own allocations to you, but the fees are higher.”
She adds: “A straightforward way to get on to a fund distributor’s platform is through an existing client that is already with that particular platform. Otherwise it is not normally a problem to get access to a platform, but without an existing client, you may have to wait a while.”
With so many asset managers looking to place themselves with distributors, or platforms like FundSettle that can facilitate distribution, the result for distributors can be an overload of ideas. “They can be deluged by providers,” says Thomas, “and if a fund manager’s product is not in demand, it can become an overhang for the platform.”
But that’s exactly why building relationships is important.
©fe March 2008