Contracting trading volumes and tightening legal, regulatory and accounting environments are impacting the overall economics of traditional Global Markets businesses. These conditions are forcing investment banks to explore new opportunities in content and format.
As a result the banks have identified a profitable product gap in the Asset Management business and have been aggressively expanding their offering of structured funds and quantitative investment strategies. They have begun to see Structured Asset Management as an opportunity to penetrate the Asset Management space at minimal cost. The newly created toolbox contains a comprehensive product offering, encompassing content, payoffs and delivery mechanisms. However, most banks have found themselves somewhat challenged by unsuited distribution capabilities.
“The key area where banks can benefit from hiring talent from the buy-side at this stage is clearly on the distribution side. This being said, as the business grows, we might also need to tap the buy-side for asset allocation model developers from quantitative asset managers, as well as people from support functions such as client services and operations.” Global Head of Structured Funds and Quantitative Strategies at a major Investment Bank
Banks initially tried to leverage off their existing generalist derivative sales teams with mixed results. Success came when banks have leveraged off their own retail and private banking networks, with some banks having raised up to 60% of their AUM through their internal networks.
The penetration of external clients, particularly Financial Institutions, as opposed to 3rd Party Distributors, has remained a challenge. Investment Banks lack credibility vis-à-vis of traditional asset managers and derivatives salespeople generally do not have the relevant client penetration. There is additionally a fundamental cultural gap between the sell-side derivative sales-force and the fund sales mindset: the selling of derivative products tends to be based on pay-off structures, while AUM for traditional and alternative investment funds are generally raised on the basis of a asset allocation story and risk profile. Their compensation structures are also at odds since derivatives salespeople are remunerated via present sales credit based structures, whereas Asset Management salespeople are typically compensated on formulaic trailer fees.
If Banks achieve the structural integration of Asset Management divisions within Global Markets departments and succeed in establishing profitable Structured Asset Management businesses – the question will still remain as to whether these businesses should be best kept integrated within Investment Banks inside the Global Markets walls, whether they would benefit from operating as a joint-venture with the Banks’ Asset Management arms, or whether they should be entirely separated from Investment Banks, as a stand-alone Asset Management arm.
Short-term Human Capital needs:
- Banks have established dedicated teams of specialist salespeople to focus on structured funds or quantitative investment strategies.
- They have hired product specialists with buy-side experience to sit between the structurers and the salespeople, to better educate the sales-force and help them sell product to clients.
- During the past year we have seen a significant level of demand from investment banks to recruit traditional fund salespeople in an effort to better target institutional clients and provide instant Asset Management credibility.
- The most prized candidates are the ones with a combined background on the sell and buy–side.
Challenges for the Banks:
- Traditional Asset Management salespeople generally find it difficult to adjust to the pace of Global Markets and to perform in the context of a trading floor environment.
- Investment banks need to adjust their modus operandi from short-term to long-term approach and build successful track records of return on their Structured Asset Management offering in order to grow investors’ confidence with Asset Management like products being sold by Investment Banks.