In the second part of an interview, Ryan Rogowski, partner at Fortem Capital, talks about new opportunities for service providers and the increasing role of platforms in new product governance framework.
The market is changing for investment banks with sales forces (depending on the bank) gravitating towards major institutional clients, for "obvious economic reasons", according to Rogowski. "A senior sales person or structurer at a leading investment bank is better positioned to cover four or five large accounts in depth and can square the numbers when bonus season comes around. Banks can focus on these larger accounts with different products and have just one salesman covering one account. That is more efficient than a sales team travelling up and down the country every week, servicing clients from Exeter to Aberdeen."
Despite outsourcing, banks are retaining quality staff, according to Rogowski. "Idea generation is focused on larger accounts, which has also opened opportunities," said Rogowski. "Small firms have a flexibility and speed that big corporate banks don't have, but this is relative, because you can show an idea to a big asset manager and, if they like it, they can trade quickly, but were you to present the same idea to a wealth manager, you would likely have to visit them; they will then have to run the idea through their investment committee and then assess how best to place it across the various pools of discretionary assets across hundreds of accounts."
Post-financial crisis, there are a few banks trying to be number one or top three in everything, but the majority are focusing on those areas where they are strong and can deliver value, according to Rogowski. "French banks get significant resources around sales, structuring and trading," said Rogowski. "If you look at American banks, they have tremendous prime brokerages and institutional businesses. But then you have banks that have all the component parts but have lost most of their senior sales people or don't have cover in some areas for different reasons, which leads to outsourcing.
"If you look at the allocations of discretionary fund managers into structured products, it is hard to find any with more than a 10% allocation so we educate about how they work in portfolios," said Rogowski. "Some of these managers would classify structured products as an equity or an alternative, based on the beta that a product is expected to have to equities. You also have to take into account that most of these managers in the UK use structured products issued by UK banks, but they also hold shares and bonds from those same banks, and they have to take a holistic view not only on the portfolio allocation but also on credit and counterparty exposure."
Specialist boutiques can go whole of market or act as pure broker with best price, value added in terms of innovation, and can tap into what the different banks out there can offer, according to Rogowski. "You can then have access to the distribution network of a large US bank, the equity derivatives manufacturing capabilities of a French bank, and so on," he said.
"It's obvious really, but local is key," said Rogowski. "This is the feedback we get from banks."
An increasing concentration on Mifid 2 will open up new opportunities for outsourcing, as will platforms single and multi-issuer. "The logic and technology for structured platforms has been there for years, but the evolving regulatory landscape (ie. UK RDR, thematic review and Mifid 2) provides additional challenges to implement fully automated systems," said Rogowski. "Product governance will have to be streamlined and automated into platforms, but this will eventually occur for more of the vanilla products."
This is also being driven by a new generation of sales people, according to Rogowski. "If you look at the background of a typical wealth manager, a platform could provide a nice solution to help automate both governance and regulatory aspects while allowing managers to keep a pulse on current product pricing."
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