When Coutts Bank decided to make the move from in-house investment management to external investment management, it did so in one year. "If you have a large gap to cross, you don't do it with two small steps," explains Andrew Hutton, the bank's head of investment management and group investment management.
Hutton joined Coutts in 1997 when the bank was going through a business rethink. It had portfolio managers in 11 different locations, who worked alongside the relationship managers putting together individual portfolios for clients. "The business was being run as a traditional private-client stockbroker, so that portfolios typically had 30 to 40 securities, some gilts and a smattering of third-party unit trusts," Hutton says.
The problems facing Coutts were threefold: investment performance was only average, dispersion of returns was fairly wide because every client's portfolio was a bit different, and the business was losing money.
The bank had two choices – either to re-engineer the asset management offering completely, or to improve the present offering. It chose the former.
The bank decided to differentiate itself by moving to a multi-manager product solution. A team of 11 at Coutts would select the best managers across the long-only asset classes, and create funds of hedge funds. To ensure consistency of performance for clients, a range of investment profiles was designed with varying allocations to the managers and hedge funds. The private bankers would assign clients to the appropriate profile according to their specific return and risk objectives.
Hutton knew that the biggest difficulty would be internal opposition. "We had to tell portfolio managers that their jobs would undoubtedly change and potentially even disappear as we implemented this new strategy. There was bound to be opposition, so we had to make management changes early. It was not an enjoyable is offering only in-house products. "If you are trying to convince your customer that you are totally independent, then you should be independent not only on manager selection but also on structured product selection, custody selection, and in advising them where to keep their cash," he says.
Unigestion offers clients a choice of 17 different custodians, depending on the clients' tax requirements and jurisdiction. But it is unclear whether clients need a range of custodians. Most private banks mainly use their own.
Similarly, for structured products, Paterson says that most private banks mainly use the in-house investment bank. The private banks argue that this is because they have long-established and respected in-house investment banking arms. Nonetheless, they admit that they are beginning to open up in this area.
Dexia Private Banking also disapproves of private banks offering hybrids of open architecture strategies. But it sits at the opposite end of the spectrum to Unigestion and Lord North Street – investment management, custody, structured products are all supplied by Dexia. "Not many competitors have clearly defined why all the part of the process.
"We needed to go forward with a good team in place. If you're going to embark on a dangerous adventure, you want to take volunteers not conscripts. If staff didn't buy in to what we planned to do, they could leave and we even offered to assist them in their exit; alternatively they could change roles within the company, and many happily chose this route."
Clients were informed of the changes, and advised to move their assets to the multi-manager strategy. "The move was in the best interests of the client. Performance would be better and more consistent, the offering was more tax effective and flexible, and the move cost-neutral to clients. Private bankers whose clients were not making the transition were under pressure to explain why."
Convincing clients
Clients were not forced to accept the new strategy, and not all of them went along with it. Indeed, while the new proposition was rolled out at the beginning of 1999, moving clients across has been a slower process. "Nearly all our clients have moved across now. Yes, the model was introduced as a big bang, but it is only now that we are near to completion."
Convincing clients and potential clients that it was an attractive proposition in the early stages was eased in part by market conditions. Hutton admits: "We were lucky with our timing. We knew that a bear market was on the cards, and that clients would be less likely to take to the new proposition if we'd lost them a ton of money. So we had to migrate them quickly.
"Furthermore, when the bear market did arrive, the falling market meant that clients could offset losses against offset capital gains and thereby migrate even faster. In the event, performance proved to be good, and significant numbers of new clients have been attracted."
Coutts, RBS and NatWest now have a combined $19 billion of clients' assets in the multi-manager strategies.