Thomas & Benson Consulting

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1 Aligning an asset manager s distribution organisation and incentives to client needs and corporate objectives Introduction Many broad based asset managers distribute products to multiple client segments and through several channels. These client segments and channels have different needs and asset managers distribution organisations have developed to reflect this. However, changes in asset management markets over the last decade or so have seen a blurring between institutional and retail segments through the increasing importance of a segment that sits between them, often referred to as the wholesale market. Ensuring distribution organisation are set-up to effectively service this segment has been (and will be) a critical driver for many asset managers. It can also be a source of chafing within distribution organisations if the issue is not dealt with successfully. In addition to aligning the distribution organisation, asset managers need to ensure that the incentives, particularly within the sales functions, are appropriately aligned to the organisational goals rather than rewarding staff while the business itself is failing to create value. What to do with the wholesale segment? The wholesale segment is often ill-defined and in order to think about how to serve it is worth defining the characteristics of the different segments of the market that many broad based asset managers distribute to. Typically asset managers have thought in terms of two broad distribution segments, retail and institutional. These are not just different customer segments; they are intrinsically different in the nature of distribution. Retail is a channel while institutional is a client segment. This distinction is most clear when one thinks about what drives sales in these two segments. For institutional clients it is almost exclusively about the intrinsic qualities of the product or strategy and, to a lesser extent, the service that goes with it. However, within retail what the product will do for the intermediaries business is a critical part of the sale. Of course, there are intermediaries in the institutional market (the investment consultants) but they are concerned exclusively with selecting the best product for their client based on the qualities of the product and its provider. The approach to distribution to the retail and institutional segments are quite different and this is reflected in the skills required to both sell to and service the retail and institutional segments. In this respect wholesale represents something of a conundrum. Rather like the nature of light, that is said to exhibit wave / particle duality as it can have the characteristics of both a particle and a wave so the wholesale segment exhibits channel / client duality. In many respects it resembles an institutional client in terms of the way managers are selected and the ongoing service requirements. However it is also very much a channel as the product needs to contribute to the wholesaler s business over and above its intrinsic investment qualities. The channel management skills and experience are more likely to sit in the retail distribution structure and therefore the wholesale distribution function would sit most comfortably within the retail distribution organisation. However, given the more onerous on-going service requirements of this segment it may make sense to carve out separate roles to focus on the 1

2 wholesale market along the lines of the strategic customer management group that is often seen in distribution businesses. How should the sales and client service functions be organised? Institutional segment Within the institutional business the separation of the business development and client service functions is an appropriate structure. In essence, the business development arm manages relationships with prospects while the client service group manage relationships with existing clients. If the functions were merged and the same people were responsible for business development prospects would inevitably be neglected as existing clients would be prioritised. This would be economically rationale since the costs of acquiring new clients is generally accepted to be orders of magnitude greater than retaining existing clients. Therefore in order to develop prospects it is necessary to dedicate some (usually modest) resource. If the cross-selling opportunity was large there may be a benefit in having a more sales flavour to the client relationship management function. However, in our experience the potential to cross-sell to most reasonably sophisticated institutional clients is generally overstated. New mandates are usually awarded only after a formal search process and the involvement of an investment consultant. Sometimes the attempt to cross-sell can be counterproductive and damage the existing client relationship. In some geographic markets and institutional client segments the cross-selling opportunity can be greater, for example, where the asset management mandate is considered part of a corporate relationship rather than a trustee governed institution. The main drawback in this structure is the hand-off from the salesperson to the client team, often when the development of the prospect leads to a pitch. However, if this hand-off did not take place a successful salesperson would build up a portfolio of existing client relationships and cease to focus on developing prospects. Retail and wholesale segments In retail and wholesale client segments the relationships are very much business relationships and the cross-selling opportunity is significant. Therefore in this case, unlike institutional distribution, the distinction between business development and client service is not necessary or appropriate. Retail intermediaries and wholesale clients expect to be sold to. Aligning incentives with structure and business objectives Variable remuneration for sales staff is typically driven by gross sales. However, it is net revenue growth that generates value for the business. Where sales staff are responsible only for new sales it is appropriate to reward them based on gross revenues rather than sales as they also influence pricing and mix - they are rewarded for what they control. This would be the case for the suggested institutional distribution structure described above where there is a distinction between sales / business development and client service. However for the retail and wholesale segments we suggested that the sales and client service roles should be combined (and indeed this is often the case) and therefore incentives based on gross new revenues (or worse, gross sales) are not aligned with the responsibilities of staff nor the business objectives. The sales staff in this type of organisation are also responsible for retention of existing business and this needs to reflected in the incentives. It cannot be in the interests of the business to pay out large bonuses to sales staff when the net flows are negative. This type of incentive basis can also encourage unwanted behaviours such as 2

3 clients encouraged to switch products unnecessarily. We would therefore suggest that where the sales and client service roles are combined, typically in retail and wholesale distribution organisations, the incentives should be based on net new revenue better aligning them to the interests of the business. The focus of the business may vary from year to year depending on market conditions or competitive conditions. In tough markets or when investment performance in significant products is weak the business may want to emphasise retention of existing business. Where sales and client service roles are combined (as suggested for retail and wholesale distribution) incentives can be tweaked to encourage sales staff to focus on retaining existing clients. Conversely in buoyant markets or at times of strong performance when the risk of losing business is less and the opportunity to win business is greater the incentives can be adjusted to focus more on winning new business. Clearly changing incentives frequently can be counter-productive, damaging morale and potentially blurring the business strategic objectives. We would suggest it is done only occasionally, when circumstances are relatively far from the norm, it is flagged to staff very clearly in advance and the rationale explained clearly and tied closely to business goals. Distribution structures for retail / wholesale and institutional segments Simplified Retail / wholesale Head of retail and wholesale business Institutional Head of institutional business Retail distribution Wholesale distribution Business development Client service Retail sales and client service Sales and service to retail intermediaries Broker desk Direct retail customers Admin queries Wholesale sales and client service Strategic intermediaries Partnerships and alliance Direct sales Building relationships with prospects Responding to queries Consultant relations Consultant research relationships Existing client relationships Incentive basis Incentive basis Net new revenue Business development gross new revenue Client service retention and client service rating Thomas & Benson Consulting Conclusion Many asset managers will distribute their products broadly across multiple client segments and through several different channels. In this article we have discussed some of the considerations in determining the structure of the distribution organisation and setting the appropriate incentives. While we have looked at the issues of serving institutional, wholesale and retail segments the reality will often be much more complicated. It will need to encompass distribution across multiple geographic markets, the needs of particular client segments such as pension funds, insurance companies and charities within the institutional 3

4 market and similarly for the retail and wholesale markets. Optimising the distribution organisation across these dimensions will maximise the growth opportunities arising from the considerable investment that companies put into developing and maintaining successful products. Thomas & Benson Consulting Limited 4

5 Who we are Thomas & Benson Consulting Limited is an independent management consulting firm serving asset managers and other investment focused companies The principals have extensive experience both as asset management practitioners and in the provision of management consultancy advice We advise clients on a range of business issues including strategy, investment management activities, organisational design and marketing and distribution Tim Thomas has experience as an investment analyst, fund manager, leader of the investment function and as a business leader, mostly gained during his 15 years at Investec and its predecessor firms. After leaving Investec, Tim worked for 5 years for McKinsey & Co, the leading global management consultancy, where he managed a variety of projects for UK, US and European financial services clients. Tim rejoined the asset management industry as Head of Equities for Morley Fund Management (now renamed Aviva Investors) and since 2007 has been providing consulting advice to a range of institutions in the asset management sector as well as to selected other sectors. David Benson has over ten years experience in the asset management industry in fund management, research, business development and client service. The experience was gained in roles at UBS Asset Management, Deutsche Asset Management and Societe Generale Asset Management. He also has 5 years experience as a management consultant mostly gained at McKinsey & Co where he managed projects focused on top management issues (e.g. strategy, organisation, branding and acquisitions) for European and global financial institutions. 5