Separation of asset management and distribution to continue

There's a growing trend for banks that control distribution in continental Europe and Asia to split their asset management arms from their distribution units and focus more on their core business, says Laurent Ramsey, Geneva-based chief executive of Pictet Funds.

And while in the midst of the crisis some firms became more selective in terms of where they source their products from, he says, that won't last long.

"It's true that, short-term, some groups have closed their gates a bit more to seek to increase their own profitability at the expense of giving objective advice to clients," says Ramsey. It's true as well that some groups have sold and redeemed funds -- proprietary or third-party -- for the benefit of banking products, in order to beef up their balance sheets.

But Ramsey views these as short-term movements, and in the longer term, the main trend will be towards giving fully objective advice to clients. "This is true from a bottom-up perspective, meaning once investors have had access to third-party products they will want to continue to have that access," says Ramsey. "Or from a top-down perspective, you see more and more distributors -- and you've seen it a lot in the past few months -- distributors disposing of their asset management capabilities and therefore relying more on external manufacturing capabilities."

Ramsey cites several examples of what he calls the "increased polarisation between manufacturers and distributors": Barclays selling Barclays Global Investors, Credit Suisse selling Credit Suisse Asset Management to Aberdeen Asset Management in December, and BlackRock's purchase of Merrill Lynch Investment Managers in 2006.

"Distributors are refocusing on their core business, which is advising clients," he adds. "And in disposing of their proprietary asset management capabilities, they remove the political burden to sell proprietary products.

Often, groups that did not have segregation in place burned their clients, because their proprietary products were often backed by the investment bank arm, says Ramsey. "They were closing funds that were, say, cash-plus products at less than 50 cents on the dollar," he adds. "So clients are not blindly going to accept proprietary products anymore."

Moreover, distributors are likely to reduce the number of fund providers they work with to reduce costs such as training and increase revenues, but it will still be through an open platform that is commonly called "guided architecture", adds Ramsey.

As for the temporary closing up of banks' architecture, some markets have clearly practised this more than others -- for example, European banks have tended to shut their gates more than those in, say, Asia. In Italy, almost all major banking groups told their branch networks to advise their clients to reduce funds and put money into banking deposits to beef up the balance sheet, says Ramsey. Meanwhile, in France, banks were offering Libor plus 300 basis points -- an obvious move, he says, to redirect money to the balance sheet.

"This is the main kind of activity we've seen in the recent past," says Ramsey. "We haven't seen our distributor clients saying they'll stop open architecture. In fact, it's probably easier today to sell funds via distributors, because clients want more transparent and regulated products now."

As for banks in Asia, Ramsey feels they are at least as open -- if not more so -- than elsewhere, for a couple of reasons. One is that banks in the region have made the decision -- either recently or a long time ago -- to focus on distribution rather than asset management. "You look at big distributors in the region -- Citi, HSBC, Merrill Lynch, Standard Chartered; they have been open for a long time and they control a big chunk of the savings in Asia. Compare that to, say, some Dutch groups that were still closed until not too long ago."

The second reason is that domestic Asian banks typically focus on domestic markets. So a Hong Kong bank might be closed when it comes to sourcing Hong Kong or China equities, because it has its own investment capacity, but it may source its overseas investment products elsewhere.

"So it will come down to how much the Asian investor is prepared to invest abroad that will determine the size of the third-party business and whether or not groups are open," says Ramsey.

Ramsey is chief executive of Pictet Funds in Geneva, which administers, supervises and distributes the Pictet group's investment funds. The group's institutional and funds business as a whole manages around $200 billion, of which Pictet Funds accounts for about half. Pictet Funds is one of the group's four strategic business lines.