For our latest ‘A chat with…’ column, we sit down with Stephane Honig, managing director, head of sales, wealth management and family offices, global markets Asia Pacific, BNP Paribas, who contends that investment banks must make structured products more relatable to investors in order to increase the penetration rate of capital markets products in Asia.
What do you mean when you say that advisory is dead?
What was called advisory in the past can no longer be called advisory. I’m pretty convinced that bringing in more mathematical sophistication or complexity is no longer the key element of the game.
But that’s where BNP Paribas’ strengths traditionally lie.
That’s true – and we also adjust our value proposition and capabilities to the changing environment.
So what is it about?
When you look today at the penetration of structured product in Asia, it’s roughly 10% of assets under management at best, and when you look at the number of private bankers who are actually using structured products in the way they construct portfolios, it’s probably in the 8-10% range. So the question is, “Do I need to bring more sophistication and complexity to increase my market share within this 10%, or do I need to think outside the box to have the overall penetration of capital market products go from 10% to 15% to even 25%?”
Amongst cash products, the percentage of cash and deposits in client portfolios in Asia is roughly in the 60% range, whereas elsewhere it’s more in the 20-40% range. Is there any good reason for this? I don’t see one except maybe time. For me the challenge is how we can make the overall pool of our business – i.e. the penetration of capital market products – much bigger in the client portfolio than it is today.
So that’s why I say “advisory is dead, long live advisory”.
Because the focus, as you say, has been on increasing penetration and profitability within that 10%?
Yes. It’s natural that everyone tries to optimize their market share in a specific wallet. I think we should also focus on growing the wallet which is available.
So how do you intend to help the industry increase the penetration to 25%?
The main difference between investing into a cash product and into a structured product is mainly linked to the ability of an investor to own the story which is backing the investment. If you are buying, let’s say, Apple stock, you are likely to have a wider perspective on Apple; if you buy a bond, you look at how much it’s paying and the ability of the corporate to repay the bond before maturity before deciding whether it’s worth taking the risk. In other words, you have some trust in the underlying investment rationale. The investment case – the story – is simple, and you as the investor have the ability to own it and monitor its relevance over time.
And structured products?
If you buy a structured product, what are you exactly buying? You definitely invest into parameters like coupon or premium. The ability of the investor to own the investment rationale and the story is lower – which keeps the number of investors using derivatives in their portfolio to a minimum.
Therefore we need to adjust the advisory, we need to adjust what we are promoting and how we are promoting. We need to highlight the investment case and rationale and demonstrate that using derivatives brings an additional benefit. By doing so, we should be able to increase the overall penetration of capital markets products.
That’s why we [BNP Paribas] are moving from product manufacturing positioning to an investment solutions provider. We think we can bring to private banks investment opportunities with a more comprehensive explanation of the underlying story, so the end investors will be able to own the story much more.
How do you sell the story behind a structured product or derivative to a client?
First, by promoting the investment rationale more than the numeric characteristics of the structured product.
Second, by explaining to the client that there are multiple ways to implement a specific investment strategy (e.g. from a cash product to something more structured), and detailing the pros and cons of each implementation method.
Ultimately, sophistication is all about simplicity, and not about things that are too complex to explain and understand. The client will only invest heavily in something that he understands.
This does not strike me as overly revolutionary. Aren’t banks doing this already?
If it was happening already, we would have more than 10% of AUM invested into capital markets products, don’t you think so?
Where does the ceiling lie?
I don’t know. It probably depends on the suitability profile of each investor.
Let’s look at specifics.
Ok, let’s take an example. Most of the private banks’ strategy towards China is about playing the new China instead of some of the sectors which have been popular when China’s economy was exports-led, like banks, energy and real estate. During the last 6 months, the parameters on some of the Chinese banks have made them actively traded by private wealthy investors.
We sometimes see a disconnect between the investment strategy or rationale and the market parameters. It is important that we highlight it to our clients on a regular basis.
First, there is a real demand from clients to understand their investment strategies better and, here in Asia, clients want their RM(s) to update them regularly on their portfolio, update them on the market situation and, essentially, to educate. The way the business has been done so far is very much reverse inquiry. Clients have habits. They are trading some specific products and they tend to stick to these. Therefore you have PBs that ask IBs for the same products and, in the end, IBs just try to optimise pricing to gain market share.
But another dynamic is happening. Private banks are engaging more on advisory (and not just selling), education, updates; and to do this, they should be more actively supported by investment banks. Because IBs have a full picture about what all type of investors are doing, we should use that to bring more investment cases and rationale so that private banks can use this to engage, educate and advise clients.
This is easier said than done in current market conditions where targets are not being met.
I’m not saying it’s easy. But when you are in a tough market, you tend to return to your historical habits. And this is where you need to have leadership and management in place to keep the pace. What we have been doing for the past few months is proposing more tactical ideas to clients i.e. investment cases that try to optimise the market situation – not only on parameters but also with a strong investment rationale. That’s why we came up with a S&P New China Sectors index which aims to offer a clean way to invest into the ‘new China’ theme. It provides much more diversified sector exposure, and is designed on the back of the Chinese government’s latest five-year plan.
More generally, what we did a year ago was put together all asset classes sales – fixed income, FX, equity derivatives etc; we started engaging with clients in a coordinated manner, and we revamped our offering processes. So instead of everyone having an idea and shooting it to his or her own set of clients, everyone now discusses those ideas together, we involve our strategist and structuring team, we strengthen the investment rationale and we propose multiple products for the same investment idea. We always go with two or three different products to our client. Our aim is to give the client a chance to see what the investment strategy looks like across different implementation vehicles.
What has been the reaction from PBs to this new positioning as you call it?
When I look at the top 20-25 clients we are dealing with, when I have met with them and explained the new strategy, it has been welcomed across the board. A few have challenged us on our ability to execute it in an IB environment, where sometimes you are more transaction driven. Particularly they have said, “Stephane, your are new, you come from the private bank, and what you are trying to achieve is something that is pretty similar to what private banks are trying to do.” I have said, “Of course, this because we need to be more relevant to the private banks.” And probably proof that BNP Paribas is keen to pursue this strategy is they took someone from the private bank to lead this initiative. One year on down the line, everyone has been supportive towards our new positioning and transformation.
What has been the key stimulus behind this strategy?
The private banking industry has been growing rapidly over the past 10-15 years. But in 2014/15, we started to see that unless you have strong market conditions, it’s going to be tough to continue growing at earlier rates. So it became apparent that we need to listen to end clients more, because if the markets aren’t supportive, you may end up not addressing the exact value attributes clients ask you to address. We conducted a deep study and we realised that there are areas where we should collectively step up, and what I realised when I joined global markets is that the IB must better support the PB industry.
But this is not all about BNP Paribas. It is an industry play. If you want to sustain the industry, we need to address fundamental questions. How are we going to convince HNWIs to shift part of their cash into capital markets products and to do it with private banks? It’s a challenge not only for wealth management, but for everyone involved in this value chain, including investment banks and asset managers. Asian investors are great clients because they want to know why and they ask why. That’s why, in our approach, we place a lot more emphasis on the “why” which we believe is the investment rationale and investment case and we make sure ourselves that before we present an investment opportunity to a PB, it meets their investment strategy.