Is Grey the New Black? – The Blurring Distinction between Wholesale and Institutional

Traditionally regarded by some as a ‘poor relation’ compared to sticky institutional assets, retail business has proved to be a fickle yet comparatively high margin market segment. Following the credit crunch in late 2007/2008, Europe’s retail segment has suffered despite higher savings rates. In Western Europe, retail AuM has contracted in total by 13% since 2007. The decline intensified in 2011, with overall net outflows of 3%, driven by net outflows in every country except the UK, Scandinavia and Switzerland. Retail profit pools have contracted even more sharply, as margins have declined faster than AuMi.

From a distribution perspective, the share of retail AuM distributed through third-party channels rose to approximately 34% in 2011. However, only a limited number of players have converted this access into substantial net inflows, leading to an unparalleled concentration, with top-quartile players capturing around 60% of recent net inflows across Europe compared to roughly 20% in 2005ii. In response to such trends, asset managers have become even more segmented in their distribution models. Equally, as the stakes have risen, the size and complexity of the ‘gate keeping’ teams within the largest global third-party distributors has increased significantly, with the selection process far more onerous and quasi institutional in nature. Even the smaller Intermediaries have increased their selection capabilities as the competition for third party managed funds intensify.

However, such a barrier is a very attractive challenge to surmount, with subsequent inflows following successful selection proving a disproportionate and far more profitable AuM source compared to the initial and on-going costs of direct retail business. In layman’s terms, the ‘bang for the buck’ is substantial.

The challenge of selection:

Given the increased complexity mentioned above, performance track record of funds has become even more important. For example, despite the continuing allocation and appetite for Global Equities, selection of these funds remains incredibly competitive with only the top percentile of managers standing a chance. In other sectors and asset classes, this remains the case, to a greater or lesser degree. Managers offering risk adjusted packaged multi asset ‘solutions’ are facing increasing competition from Intermediaries with significant in house asset allocation capabilities. Indeed many intermediaries of all sizes offer their own product ranges.

Managers which benefit from scale and a mix of both strong performing single fund capabilities and risk adjusted solutions are able to tailor their approach depending on the intermediary. However, those providing either the building blocks (i.e. single funds) or the block itself (solutions) are limited in their target audience.

The response from a distribution perspective:

Providing performance justifies selection, managers are faced with a decision as to which Intermediaries to target. The larger the Intermediary, the higher the potential prize but also the more complex the selection process. In response to this, many firms have focused on significantly building out a dedicated distribution channel solely focused on the Global ‘tier 1’ intermediaries, ‘strategic key accounts’ or ‘strategic partners’. These are distinct from the Nationals and Networks and Platform providers and typically number the largest global Private Banks and Wealth Managers.

There is also increasing conjecture as to where these teams should sit and whether they would be better classified as retail or institutional. There are arguments for both but in less developed markets, in particular the potentially lucrative Scandinavian nations, institutional business and ‘Distributor’ (wholesale) business are often treated as one. This has placed a greater premium on individuals with extensive contacts and knowledge in both sectors.

In more developed markets, such as the UK and Germany, there is a greater degree of separation. Whatever the classification, whether grey is indeed the new black, individuals who have proficiency and depth of contact in this channel are at a premium.

Recent completed Searches for clients have shown us that the following skills and experience are in high demand:

  • Multi-jurisdictional experience.
  • Ability to influence key decision makers all the way up to Board level.
  • Significant depth and level of contact with the larger global Intermediaries.
  • Experience of fee negotiation, often on a global basis.
  • Ability to co-ordinate the fund sales efforts of country specific sales teams.
  • Cross Asset-Class knowledge and expertise.

While debate may continue about the classification of business such as this, what cannot be overlooked is its continued importance. Managers who have grasped this early and sought individuals with a mix of the skills and access highlighted above have stolen something of a march on the competition. Those who are able to do this on a coordinated global basis are arguably slightly further ahead of the curve.

i Source – McKinsey & Co publication – The Global Asset Management Industry 2012.
ii Ibid