Distributor screening needed, consultants warn
In the final of three features on Germany’s fund industry, consultants say that managers should partner with fewer distributors.
It is a good idea to be choosy when selecting a partner, but this might be difficult for German managers.
Regulatory pressure leads public bank distributors to accept ever more products; private banks and family offices seek new funds to differentiate themselves; and self-directed retail investors are open-minded, too.
Ben Phillips, partner at management consultant Casey Quirk, notes that all Continental Europe is “shifting from a dynamic concentrated on retail banks, to one where multiple channels fuel growth”.
Jens Baumgarten (pictured), head of the asset management unit of strategy consultants Simon-Kucher & Partners, says of Germany:
“In the past, securing a key distribution channel was a great strength for an asset manager. In the future, it will not be, not least because of a more open mind-set investors have. They are looking actively for other managers, not only the three or four main ones in Germany.”
DekaBank and Union used to be the gateways to about one-third of Germany’s retail market.
Researcher Mackay Williams estimates that Europe’s banks hold a similar share of pan-European retail assets.
At the same time, foreign managers such as Franklin Templeton and Carmignac have been taking market share.
Across Europe, 75% of net distribution of mutual funds since 2005 was by foreign managers.
Europeans, including Germans, seem under-equipped to fight back. The crisis highlighted “glaring underinvestment [by European asset managers] in third-party sales and marketing talent required to tap increasingly influential non-bank distribution channels,” according to Casey Quirk’s study of asset managers within European banks and insurers.
Phillips recommends heavy investment in sales professionals, “particularly more technical personnel, such as consultant relations officers and portfolio specialists, both of whom can appeal to professional buyers.”
Phillips adds that data shows firms with significant distribution investments grow “much faster than their less-leveraged peers”.
Strong, experienced and empowered distribution teams are one of four good distribution practices, he says.
The others are: “rigorously and realistically identifying and prioritising target market segments and distribution channels”
fitting your firm’s competitive advantage; “having distribution appropriate in size and quality to your firm’s growth ambitions; and “carefully placing clients in hierarchy.”
As more distribution doors open, Baumgarten says managers should not try to enter every one of them.
“Pick one or two distribution partners as your key lead ones, which is more efficient than working with many, and the costs of serving many is probably higher.
Managers will become more targeted in who they work with, both within distribution channels and between them, and you must make sure your chosen partners are offering the highest value, or pick those that do.”
But, in choosing the best channel, managers must ensure they can satisfy what the distributor and end-client needs, Baumgarten adds.
“You have to be able to tell investors what you offer, but to do that you have first to understand the channel. A family office or wealth manager or institutional investor might be focused on generating recurring, stable returns over years.
“If you as an asset manager have a strong communication platform – for example a group such as Fidelity – you can look for partners that want all the services you can offer, from marketing and sales support, so the retail of IFA market may be good to participate in.
“Make sure you know what a partner will look for, and do not forget that may include sales and marketing, back office and support services, and investment process.”
Some partners will be ‘high maintenance’. As German investors shift their focus from product to advice, distributors may require experts attend their office to explain products to them, and clients.
Phillips notes: “Distributors will act less like platforms and more like professional buyers. Family offices will apply more technical criteria to select best-of-breed funds that fill certain gaps, either directly or through sub-advisory mandates, in their product offers.”
The distribution fee model is also set to change. Casey Quirk says: “Further iterations of the MiFID are likely to shine a brighter spotlight on fund commissions.
This will force distributors to justify how they selected the third-party products they offer, and likely focus attention on the role of advice in fund sales.”