Let us turn the clock back 10 years, to when PWM was being launched in 2001. Following the arrival of the euro, American institutions in particular started to view Europe as a virgin market of growing numbers of wealthy individuals, hungry for risky capital markets product created by investment banks. Similarly, local European banks such as UniCredit, Commerzbank and SocGen began to market derivatives such as warrants directly to wealthy individuals in neighbouring countries.
Swiss banks, at the same time, began to refocus efforts on asset allocation, dogged by real worries that a combination of tax amnesties, a proposed new withholding tax and increasing attacks on secrecy, would force them to fully redraw their value propositions.
Institutional asset managers, on the other hand, were busy spinning off wealth management arms to leverage strategies, once exclusive to the world’s largest pension funds and central banks, for distribution to high net worth and mass affluent markets.
These three simultaneous trends converged to hugely increase the scope of products and services available to wealthy investors.
Of course, all was far from rosy, as these changes were taking place against a background of terrorist attacks on New York and Washington DC. These caused mayhem in world markets and heralded a new political order in which the US was no longer able to call the shots, either militarily or economically.
Also fast becoming evident was the lack of the sophistication in the private wealth world, allowing private clients to be exploited by investment bankers. Like many colleagues, Michel Meert, now head of wealth management EMEA at consultants Towers Watson, was moving from the institutional to the private wealth world in 2001 and was surprised by what he saw.
“I wanted to use the technical skills of the institutional world in private wealth,” recalls Mr Meert. At the time, French groups such as Axa and CDC Ixis were keen to bring pension fund-style disciplines to the top end of the retail market. “But it was a huge disappointment. Private wealth was simply not ready for this.”
DISTRIBUTION PARAMOUNT
There was much institutional-sounding talk about “innovative” strategies, “balanced” funds and “multi-style” investments. But in reality, many portfolios were altered and managed not for the benefit of the clients themselves, but for the banks issuing the products. Unlike the institutional world, where emphasis was firmly on managing investments, distribution of funds rather than their actual performance soon became the real benchmark of success.
Despite all the trendy talk of “open architecture” – the use of best products from the vast universe available, to improve results being demanded by increasingly financially literate clients – the reality of product selection remained starkly different to public claims of the banks in Europe. Banks continued to stuff private portfolios full of house-produced funds, says Mr Meert, particularly those charging higher fees.
But there were stirrings of change in Germany, where Deutsche Bank, Deutsche Postbank and Frankfurter Sparkasse began to sell Fidelity’s European Growth fund in 2002. “We thought it was Christmas,” said an incredulous Thomas Balk, then Fidelity’s European business boss. “Deutsche Bank came to us and said: ‘We want to sell your funds’.”
This shock move was only an appetiser to what the German powerhouse would do next, introducing the “guided architecture” model, following a parallel move from cut-throat competitor Commerzbank.
An A-list of partners – including Fidelity, Franklin Templeton, Invesco, Schroders and UBS – were signed up to offer exclusive advice to the bank’s private clients. Bosses at the in-house funds arm were not best pleased, with some complaining about Deutsche having “invited strangers into the bedroom”. Yet they eventually calmed down when they found out only products in particular sectors would be outsourced. Where there was any doubt at all, DWS funds would have supremacy.
Perhaps the strongest move towards use of third party products happened in the UK, where James Bevan, the highly-intellectual investment boss at fading bank Abbey National, outsourced his entire £30bn (E35bn) portfolio of customer investments to some big brand external managers at the beginning of 2004.
But even as the open architecture movement picked up steam mid-decade, there were enough vested interests to kick it in the shins every time there was an economic downturn. Some banks such as Dexia, publicly refused to sign up, saying their own products were so good that third-party strategies were simply not needed by their clients.
And looking at its legacy today, observers would be forgiven for thinking that, just like the feminist movement in the 1970s, the revolution had never actually taken place. “If we look at where we are now, the trend is diminishing,” admits Mr Meert. “There is a bit of open architecture around the fringes, but internal products still dominate, as they are the most profitable.”
Today hope lies with some boutique firms, starting to manage privately-held assets institutional style, focusing on providing dividends to match liabilities, rather than distribute populist products. This new approach makes use of increased European issuance of exchange-traded funds, which helps vastly reduce the cost of managing portfolios.
