CATEGORISING YOUR CLIENTS: RETAIL, WHOLESALE, INSTITUTIONAL – AREN’T THEY JUST CLIENTS?

State of play:

• Across the board, asset managers are seeing changes in how they think about their clients, and this has huge implications for the organisational structure of their sales and distribution teams.
• Increasingly, client categorisation looks more at the complexity of client needs, revenue, scale and client behaviours, as opposed to the classic distinction of retail vs institutional.
• This roundtable discussed how this is actually happening within asset management, and the challenges asset managers are facing when adapting to this new world. 

Headlines:

• The ways in which asset managers categorise clients is evolving. Increasingly it depends on the complexity of their needs and overall revenue and/or scale.
• We are increasingly segmenting clients according to their behaviour as opposed to what kind of institutions they come from.
• Distribution and client servicing teams must adapt to change as the market becomes more dynamic – teams within teams is not hugely beneficial to clients or asset managers. This will, in time, have a profound impact in organisational terms on asset managers and how they organise their sales and distribution teams.
• We also now see a very different type of sales-person, people with technical understanding who can talk across asset classes and products and understand the value each product has to individual customers across a broad range.

Key themes:

The way in which asset managers categorise their clients is evolving but in differing ways:

• The roundtable opened with almost unanimous agreement that the ways in which asset managers categorise their clients is evolving, however there is differentiation in how this is happening from group to group.
• Delegates provided an overview of how they each were approaching the situation and how this differs in different markets (where applicable).
• In terms of challenges, delegates agreed that the biggest hurdles have been pricing this into their distribution models and coordination (or lack of) amongst sales teams, which were traditionally divided and remain somewhat competitive.

 The differences:

• Our expert laid out the traditional audience categorisation model for asset managers, which scales clients based on size, decision complexity, the degree of customisation they required and the fees they are prepared to pay. Within this traditional model, the ‘line’ between retail and institutional clients generally falls half-way down the scale
• Across Europe, the split between these camps is roughly the same in terms of asset size, however there is a distinction in flows. Where the institutional market has seen a steady upward trajectory, there is much greater volatility in the retail space.
• Similarly, whilst there are parallels between the asset classes used, in the institutional space there is a much greater use of complex liability driven investment structures, which are not seen so much in the retail space, whereas retail portfolios are more reliant on multi-asset products.
• In running through these environments, our expert reiterated that these are two very different types of customer with different behaviours, and as a distributor, you cannot move neatly from one path of demand to the other.

Asset managers are overwhelmingly ‘moving their line down’ and treating family offices, private banks and wealth managers like institutional clients:

• Nevertheless, changes are happening, and asset managers are overwhelmingly ‘moving their line down’ and treating family offices, private banks and wealth managers like institutional clients, because they are behaving in a more institutional way.
• One delegate added the importance of influencers or gatekeepers, and how in many cases, categorisation should be more about who is influencing the flows as opposed to the type of customer themselves.
• With 70% of the UK platform market under influence of some kind, through funds of funds, buy lists or model portfolios, these gatekeepers are now some of the most influential customers and need to be serviced and priced accordingly.

Different forms of categorisation:

• One delegate also highlighted the ability of categorising clients by longevity. For example, while you have long-term treasury or pension fund mandates, which you ‘really have to screw up’ to lose, direct to consumer retail investors will also stick with you for a long time.
• Instead the ‘middle ground’, based on the traditional scale outlined above, can be the less reliable and have a much higher turnover of assets. In terms of how this changes distribution behaviour, the delegate noted this is something they consider when thinking about segmentation. For example, high turnover clients needed to be sold different products which they are less likely to turnover.
• Furthermore, within the current trend of wealth managers moving into segregated mandates (and in doing so getting lower fees) there is an expectation that they will stay in the fund for longer (especially due to the technicalities involved in setting this up.) Overall, this is the fundamental change to the sector brought about by RDR, and means asset managers are increasingly looking at 10, 20- and 30-year windows and the inter-generational transfer of wealth.

So how does this work in terms of pricing?

• One delegate noted that this is where private and listed asset management companies differ. Where a private company could accept a large mandate on a very small fee based on their expectation of the mandate to significantly grow and stick with the firm for the long-haul, listed corporations are often not in the position to be able to accept such low ball offers from wealth managers or similar buyers.

So, what does this mean for distribution teams?

• Sales people now need to be much more technical. The ‘old guard’ days of the sales over Twickenham and Gin and Tonics are long gone, and sales need to be brutally competitive, thinking about why buyers would want to make the time to see them. That can either be because you have a strong range of products, or that you can bring an insight that others can’t.
• We are now seeing a much savvier, sophisticated type of sales-person in asset management, who can talk across asset classes and capital markets, as well as the technicalities of each product and the value it has for that individual investor.
• Brand is also an increasingly important focus

Conclusions:

• There is general agreement that the ways in which we view clients is changing.
• Client behaviour is more important than ever, as opposed to evaluating servicing levels and based on the ‘type of’ institution they come from.
• Influencers or gatekeepers are increasingly important, and this needs to be considered in pricing.
• Longevity of funds is also a huge factor when it comes to pricing.
• This has a wider implication on the ways in which we structure our sales and distribution teams, as well as the skills we look for when hiring for those teams.