In a new series, Funds Europe, in conjunction with Investec Asset Management, looks at the challenges affecting fund distributors around the world. Roger Bacon, managing director and head of managed investments for Asia Pacific at Citi Private Bank, explains the benefits of an open, client-centred approach.
What are the lessons you have learnt over the last five years?
Firstly, a carefully planned approach to how we help clients build their portfolios does a good job in the medium term. It is about focusing on a small number of funds but also trying to simplify the message and the mechanism of delivery.
There is a lot of very sophisticated product development in the industry at the moment and clients are suggesting to us that that they would prefer to go back to basics. We are looking at more plain vanilla offerings and that has a bearing on the product development of funds, though we are careful not to compromise innovation.
We’ve also focused much more on reducing the level of turnover in clients’ portfolios and making decisions on a longer-term view. That means trying to put in place building blocks that will be the core of the portfolio for hopefully several quarters, maybe even several years.
What do you see as the biggest challenges facing your business over the next couple of years?
Pricing for commoditised products, plain vanilla mutual funds, is becoming an issue. There is increasing margin pressure on these products, simply because they are available via multiple mechanisms and counter-parties. If your model is built on providing advice to clients, then you will not be able to compete with execution-only, low cost providers who are not offering advice on why a fund is useful or how it fits into the portfolio.
In Asia, we spend an enormous amount of time with the regulators, working on ideas and providing constructive feedback. This has been a major change and is a very positive development for the industry. Collaborating with regulators means there’s a good chance that can help them to protect investors, but also to provide a common sense framework so that the right sort of clients are not prevented from getting access to products that are relevant for them.
Where do you see the greatest opportunities?
The penetration rate of funds in typical client portfolios in Asia is still lower than the equivalent portfolios in the US and Europe. We believe that there is a great opportunity to increase the amount of fund activity that a typical client utilises in Asia.
Secondly, we have seen a massive increase in demand for hedge funds over the last year, despite the level of interest from high net worth and retail clients in Asia between 2008 and 2012 being almost non-existent.The risk-adjusted returns of the asset class really started to show dramatic improvement in 2013, and that has continued.
We have also seen a huge opportunity to provide clients access to more specialised deals that historically would not have been available to them. This is predominantly within private equity and real estate, where we’ve spent a lot of time with high net worth clients, helping them to access illiquid asset classes in a more sophisticated way.
How do you feel you make a difference for your clients?
We have a breadth of platforms that allows us to be able to offer clients a one-stop shop for the majority of their investment needs, but objectivity is key. Our view is that we should only be looking to sell best-of-breed funds and capabilities to clients and that we should have a level playing field across all asset managers with whom we partner. This means clients know that when we’re putting a fund recommendation in front of them a lot of work has gone into it and we believe it is the best opportunity for them.
How do you see your business models changing as a result changing business pressures?
It is essential to have fully open architecture to be able to demonstrate objectivity to clients. We’ve spent a lot of time implementing an open architecture strategy to ensure that the clients have access to all quality ideas, whoever the fund manager happens to be, via our platform. The pressures on businesses to avoid conflict of interests or claims of favoritism can largely be addressed by having open architecture.
We are starting to see more interest in wrap-fee structures. Historically in Asia, g has been built around transaction fees, but clients are beginning to feel that the pricing mechanism is complicated and unclear. We believe that a model where you charge one fee based on overall assets under management will become more normal in Asia. In Europe and the US it’s already entrenched in the industry.
What are the greatest influences on your business?
The biggest influence is our clients. Since 2008, clients have become more engaged, sophisticated and conscious of things like asset allocation and risk management. That’s forced the industry to think about business models and move away from a “sales pipeline” mentality. The client is at the centre of what we’re doing and that is an important emphasis for us.
Clients’ expectations of return have also come down since 2008, though in Asia they are still higher than in Europe and the US. Clients in Asia are also prepared to tolerate more risk, and these factors really influenced the way that we build our models.
Looking five years ahead how do you see the industry?
We’re going to see more consolidation. The huge investment required to create a full investment framework for clients means we’ll see some of the smaller players merging, or being folded into bigger banks.
We may see more targeting by client segment. Many fund managers and distributors have tried to sell a huge array of products to all clients, and that will be challenged.
Distributors are going to see more power resting with them and will build genuine partnerships with fund managers. They will also have more control over product development, rather than that just coming directly from a fund manager.
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