Just change already What the Institutional Investor needs and why financial service partners can’t provide it
Josh Feldmeth Chief Executive Officer Interbrand New York
Dan Spiegel
Interbrand IQ: Focus on the Institutional Investor
Senior Consultant, Strategy Interbrand New York
The choppy wake of 2008’s historic financial crisis has delivered a period of prolonged uncertainty, leaving many industries in a difficult search for new growth opportunities.
No doubt, uncertainty within the Euro-zone and the looming threat of still more regulation have both played a role in stagnating growth for financial firms. However, these systemic shocks have not only created medium-term growth hurdles; they have, more broadly, distracted firms from yet another seismic shift in the dynamics of the marketplace – the evolving needs of the institutional investor. In this paper, we will examine how the institutional investor as a customer bloc has changed forever, why the brands that serve this group have not, and what these brands need to do in order to properly serve customers and find new growth outlets. fig. 1: Financial Performance Asset Management Industry 2007-2011 (indexed to 2007)
Some brands have demonstrated a better ability to respond to shifts in the underlying dynamics that govern demand. Technology brands like Samsung, automotive brands like Audi, and business services brands like IBM, show us that being able to quickly read and ultimately respond to customer needs continues to be the recipe for growth in our new reality. Common to all those who are able to succeed within this new market paradigm is a laser-like focus on customer needs and an ability to nimbly respond to shifts in their behavior. While the aforementioned brands serve as beacons for growth in a down economy, the asset management industry remains in an on-going struggle to find new revenue to offset increasing costs (see fig. 1).
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120 100
Revenue
80
Expenses
60
Profit
40 20 0
2007
2008
2009
2010
2011
Source: 2012 McKinsey North American Asset Management Benchmarking Study
The institutional investor has changed, permanently Quantitative and qualitative data dating back to 2008 tells a clear story: Institutional investor needs have changed. What was once about outperformance is now about solutions, with three factors accelerating the pace of change. 1. The ongoing search for returns This should come as no surprise. Still reeling from the first decade of the 21st century when the S&P 500, over a ten year period, produced a net loss of -1%, investors have tempered their expectations for the kinds of returns they should expect. The looming threat of more financial regulation is adding to this recalibration of expectations. Less confident that they can generate the returns they need through the traditional channels, institutional investors are changing course and looking at new opportunities. Consider the $673bn outflow of capital from relative return equity funds over the last five years compared with the $323bn inflow to solutions-based products (see fig. 2). These types of solutions, developed on a client-by-client basis, offer the investor new tailor-made paths to generate income while hedging risk. fig. 2: Total flow of AUM 2007-2012
Net fund flows 2008-June 2012
$642 billion $323 billion
$4,874 billion -$673 billion
Source: Strategic Insight Simfund
2. Globalization Globalization presents a second driving force of change governing the needs of the institutional investor. The crisis revealed the degree to which investors were exposed to risk and now, to ensure they are well guarded against unseen threats, many are looking to diversify investments across borders. As investors look for new opportunities, they rely on both a strong understanding of the opportunities that these markets offer, along with a strong command of the regulatory environment. As one investor we surveyed in Asia put it, “you really need to understand the lay of the land to succeed.” This dynamic is
Global specialists
9%
Global generalists
-6%
Retirement
1%
Multi-boutique
3%
Focused-niche players
-3%
Ambitious, but un-focused
-4%
Source: Institutional Investor, Top 300 Asset Managers; McKinsey & Co. analysis
3. Shifting market dynamics The world is shrinking, aging, and becoming more transparent – and it is happening all at once. Consider the scary reality facing pension plan sponsors. With the population of Americans age 45 to 64 now over 81 million (a new high), those on the hook to fulfill pension obligations throughout the twilight of the baby boomers’ years need a path to profits. In this scenario, relative return is not enough.
We have been measuring this movement toward solutions for several years. The data points to a complete and dramatic reset for the category.
Solutions
Traditional relative return active equities
Change in AUM share 2002-2011 fig. 3: Change in AUM share 2002-2011
Outcome-oriented solutions, like income generation, fill the gap left open by lower interest rates, fewer dividends, and the unavailability of guaranteed annuities going forward.
AUM, end of 2007
Includes target date/risk, tax managed, inflation protected bonds, principal protected & 529 college savings (all in single funds or fund of funds)
driving the redistribution of AUM toward global specialist firms that are able to offer investors a more comprehensive suite of cross-border solutions (see fig. 3). The investor demands a better understanding of the unknown and a solution to help him or her win in new markets.
Five years ago, when asked what factors they evaluate when choosing investment managers, only 44% of institutional investors indicated the ability to deliver complex solutions as “extremely important.” (see fig. 4) By 2010, that figure has soared to 77%, and will continue to increase in importance. The ability to deliver specific, outcome-based solutions is an overwhelming driver of choice, a fact that confronts any brand wishing to remain relevant. So, if investors are moving toward solutions, are financial services brands helping them get there? The answer is no. As a CIO of a leading global automotive manufacturer told us last year, “the technical capability that is required to think critically about a solution is hard and many companies just don’t invest in that. They don’t want to invest the time and the people to think through these solutions. This is true of the industry as a whole.”
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Restructuring + Resetting + Retooling
fig. 4 : Factors evaluated considering for new or additional Factorswhen evaluated whenproviders considering providers Asset Management for new or Business additional Asset Management Business
2008
2009
2010
Willingness to collaborate to find the right solutions for the client's need
44%
57%
77%
Organizational strength and stability
64%
62%
54%
Source: BNY Mellon Industry Research, 2010
Slower to change, quicker to lose As a market participant, the institutional investor has transformed from an actor, historically concerned with performance and security, into something resembling a consumer, demanding built-to-suite solutions and relevant outcomes. This transformation is complete and irrevocable. They will never return to the good old days where tombstones and league tables were proof enough. Why haven’t financial service brands followed suit? The systemic shock of 2008 provided the perfect fulcrum on which to pivot their organizations and brands away from the insular, self-referential stance that has long defined financial services brand positioning and toward the customer. Investors wanted it. Regulators pushed for it. Boards of directors pleaded for it. These institutions had every reason and opportunity to truly become investor-centric. Such a shift would not only have signaled to investors that the lesson of the crisis had been learned, but also would have laid the foundation for long-term partnership. They needed to change, but unfortunately, many never did and have paid dearly through net asset outflows, lagging share prices, and long-term brand value erosion (see fig. 5). It’s clear that inaction led to value destruction, but the causes underlying their failure to evolve are more complicated. In our study, we learned that many had the data evidencing the investor shift, and those that didn’t intuited the movement among their clients. Indeed, many wanted to transform. Some even engaged in substantial strategy and repositioning work during the crisis and early recovery (late 2008 – 2009). But in the end, few large financial services organizations have been able to reposition their brands toward investor-centered solutions. The limits of transformation can be linked to three inexorable forces that have dominated the financial services firms’ agenda since 2008:
Restructuring Since September 2008, beginning with the Lehman fall, the Merrill fire-sale, and the subsequent TARP bail out – a period one observer called “the greatest bank restructuring since Glass-Steagall” – the industry has been in a nearly continuous state of restructuring. Asset sales, reductions in force, large-scale cost containment programs, balance sheet restructuring, stress tests – nearly every global player has been forced at some point over the past five years to commit significant discretionary resources to restructuring the business in order to survive. These resources could have been used differently. Instead of negotiating asset sales, M&A teams could have been acquiring greater capability in consulting and client services. Technology investments could have been made toward improved investor experiences. Product strategy teams could have spent more time on cross-firm solutions. Marketing efforts could have been adding value through thought-leadership instead of rebuilding basic trust. The recent history of ING is a case in point. The Dutch financial institution agreed in October 2008 to divest its Insurance and Asset Management business by the end of 2013. In the summer of 2011, it sold its Latin American business for $3.9 billion and shed its pioneering online retail business, ING Direct. It is still navigating anti-trust concerns related to the sale of its $7 billion Asian business, and on November 9, 2012, four years after it started restructuring, ING filed for an IPO of its US business. ING has moved skillfully through the process and will most likely complete the required transactions by the end of 2013, but at what opportunity cost? Firms don’t just have limited financial resources. They have limited focus as well. The effort required to fundamentally restructure their post-crisis businesses has structurally prevented them from rebuilding organizations around investor solutions. Five years on, institutional investors have evolved while their potential service providers have labored simply to rebuild. fig. 5: Financial Services Brand Value ($billions) Financial Services Brand Value ($ billions) 120 100 80 60 40 20 0
2007
2008
2009
Source: Interbrand’s Best Global Brands 2012
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2010
2011
2012
Retooling Today’s institutional investor is demanding solutions, but financial services providers are built to perform against a different set of metrics. In order to win, they must retool.
Reputational repair requires a simple formula. Confront the problem, apologize for it, fix it, and demonstrate that it has gone away. It’s a formula that has been validated over decades (see Tylenol, Toyota, Martha Stewart, etc.).
Retooling an organization’s technology, process, and culture to think and behave in terms of client outcomes takes time. Some progress has been made.
Unfortunately, financial services brands have struggled to put the crisis in the past.
Product architectures have been opened to enhance investor choice. Asset Management boutiques have pulled more closely together to resemble joined-up platforms. Lists of “golden clients” have been compiled. Teams are being incented on sell-the-firm schemes. Chief Technology Officers are rewiring legacy systems in hopes of the new holy grail – the single client sign-on. Yet despite years of effort, our experience is that retooling is not keeping pace with the rate of transformation among institutional investors. One reason is obvious. Retooling equals change. Delivering solutions require new skills that senior talent often lack or are slow to adopt. The process of delivering solutions is fundamentally different than delivering performance – it is horizontal, cutting across systems and teams, rather than vertical. These changes not only affect how the firm goes to market, but also the types of people and behavior it rewards. Technology and process are costly and slow to change. But changing people is even harder, as Peter Senge, from MIT’s Center for Organizational Learning reminds us: “People don’t resist change. They resist being changed!” Another potentially less obvious factor is increased regulation, which is having an unintended negative effect on brands’ ability to retool. The act of communicating to customers today is appreciably more challenging. In-house counsel is conservative; marketers feel handcuffed, creating a slow and tortured marketing process that blunts a brand’s ability to make a customer commitment. It’s the old catch-22: Institutional investors need to hear a new story from financial services brands that those brands are paradoxically less free to communicate. Resetting Dozens of studies have documented the decline in investor confidence and trust in the financial system and its institutions. They have suffered significant reputational damage that they must repair. However, these efforts are thwarted by a bad-news cycle that resets their reputation back at each turn.
Protracted restructuring and continued balance sheet vulnerability keep these brands on the front of the financial pages. The sputtering recovery is a constant reminder of what caused the problem in the first place. And a string of scandals – from rogue traders to FOREX litigation, Ponzi schemes to executive compensation – weighs these brands in the past. This is reputational resetting: Every time the brand makes progress toward repairing its standing, a fresh crisis pushes it back. No case demonstrates the resetting dynamic more than UBS and Credit Suisse. Before the crisis, UBS had built an integrated global franchise around the strength of its enormous private bank. The brand was riding significant momentum behind a powerful, customercentric brand strategy, anchored in the “You and Us” campaign. While the two banks essentially represented Swiss banking to the world, UBS was the bigger business and the better brand. Then came the crisis. Both banks were affected, but UBS took the bigger hit, famously taking $60 billion from the Swiss government. Since then, UBS has been beset with one public challenge after another, forcing a revolving door in the C-suite and a major bloodletting in the investment bank. Subsequently, the UBS brand has been forced to reset. It abandoned its “You and Us” advertising for a campaign based on client testimonials and the promise to “not rest.” The brand has literally had to step backward from a benchmark standard for client partnership to a more basic positioning of promising to work hard. Credit Suisse has followed a different trajectory. In late 2008 and 2009, at the height of the crisis, the executive team spent months working out a client-focused brand strategy. They rebuilt internal processes to deliver it and hardwired it into the culture via performance evaluation and the competency model. They coupled a capital light business strategy focused on balance sheet strength with advertising that literally put the client front and center. Two nearly identical institutions, two very different fates. UBS was forced to reset. Credit Suisse raced toward the customer, a move that has vaulted it ahead of UBS as Switzerland’s most valuable banking brand according to this year’s Best Global Brand rankings. Interbrand IQ | Pg. 5
Adapt. Or die. No doubt, firms must re-engineer to deliver a truly customercentric value proposition if they intend to meet growth requirements and fend off new entrants to the market. Doing so cannot be an exercise in cosmetics. It will take investment and vigilance.
Scale specialty As has been the case in many industries over the last decade, finance made a movement toward both consolidation as a business model and product breadth as a strategy. While the events of 2008 intensified this, the wheels were already in motion when the crisis hit.
But, it can be done and the playbook is clear:
Today, the market is awash with large, one-stop shop firms that were pieced together in an effort to achieve more scale. However, the strategy of scale is largely self-serving. It enables the firm to take cost out of the business and command greater pricing power, but the investor is served by an increasingly complex and slow moving institution.
1. Build insights capability: leverage Big Data as a core capability 2. Scale specialty: deliver deep specialties across a unified global platform 3. Connect the dots: integrate marketing with thought leadership and the client experience to add value 4. Reset rewards: change culture, competency model, and rewards systems to reinforce a solutions-over performance mentality
Build insights capability What the customer wants is sitting right under the firm’s nose. Big Data, if leveraged correctly, is a game-changing opportunity for financial firms desperate for richer customer insights and a competitive advantage in the race to better serve investors. According to a study conducted by the McKinsey Global Institute, Securities and Investment Services firms actually store the largest amount of data per firm of any industry on Earth (see fig. 6). The magnitude of this data, garnered from an immense amount of transactions conducted every day, is matched only by the magnitude of the possibilities the data presents. Being able to harness it to derive meaningful client insights provides the most impactful path to understanding shifts in the customer’s needs. Brands like Amazon and Google, born in the digital age, serve as beacons for how to approach Big Data correctly. While it may feel more natural for these out-of-category enterprises, the shared element of their data strategy is a focus on using it to drive customer outcomes. This is precisely where financial firms need help. While we are still at the dawn of Big Data, it is clear that financial firms have mainly concentrated their data efforts around product performance in the name of squeezing basis points from fledgling portfolios. To use Big Data as an investor advantage, these firms will need to take a page from the Amazon playbook and unleash it on producing insights tied to customer outcomes.
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Financial firms have the assets they need to construct more sophisticated solutions for customers, but it requires speed and nimbleness. Over the coming years, the winners and losers will increasingly be defined by those who are able to nimbly orchestrate their own portfolio of products and services to respond to customer needs that produce legitimate outcomes. Consider the trend toward the boutique model within the asset management industry. As a recent State Street study titled “Empowering Boutiques: The Rise of the Specialist Manager” claims, “boutiques are the speedboats of the asset management world. Their lean organizational structures and manageable asset levels allow them to respond quickly to changing market conditions and new opportunities.” Innovating the business model through an approach like boutiques, enables the firm to couple speed with scale. Companies like Franklin Templeton put this strategy to work, with three independent boutiques – Franklin, Templeton, and Mutual Series – each operating independently on a single global platform. The customer is delighted to work with a specialized firm, but also benefits from the strength and stability of the larger institution. Specialty approaches, like the boutique model, will need to increasingly take form to enable firms to act more quickly toward delivering solutions built around the customer – not around the firm’s capability. Stored data per(>1,000 firm (>1,000 employees), fig. 6: Stored data per firm employees), 20092009 Securities and investment services Banking Communications and media Utilities Government
3866 TB
1931 TB
1792 TB
1507 TB
1312 TB
Source: IDC; US Bureau of Labor and Statistics; McKinsey Global Institute analysis
Connect the dots Many financial firms continue to view marketing departments as sources of communication rather than designers of the total investor experience.
A final thought – it’s a journey
This issue is a structural one, and can only be changed by rethinking the role that marketing plays and where it sits within the company.
This study points to a fundamental shift in the institutional investor. It documents the barriers that limit the financial firms’ ability to move accordingly. It lays out the significant investments required to get there. It cites example organizations that have thoroughly transformed and to those managing financial services brands, it all may seem a bit too daunting.
In truth, maximizing value from marketing means being able to connect the dots between customer insights, marketing communications, thought leadership and the customer experience.
While understandable, this shouldn’t be the takeaway. Despite the challenges, there is enormous opportunity for financial brands. Investors’ needs are clear, and competitive whitespace abounds.
Consider IBM and the way it has positioned itself around key members of the C-suite. The brand promises a Smarter Planet and makes good on the claim by targeting specific members of the executive committee with value-adding thought leadership, like the Global CEO Study, and forums, such as the CMO CIO Leadership Exchange, where highlevel client peers exchange ideas that not only make the planet smarter, but equip the client to be more successful. This is integrated marketing: thought leadership, connected experiences, and client-centered solutions rolled into a power message of relevant outcomes (i.e. Smarter Planet).
It’s also important to remember that the journey toward an investor-centric brand will never end. One of the world’s great brand managers, P&G, has been working at this since 1937 and only created the category management function in 1987. And they continue to learn today, as their target consumer segments shift in a globalized marketplace. The lesson here: Being investor-centric is a move toward continuous movement. Markets will continue to roil and investor needs will continue to evolve. The only constant will be change itself. And it is in this transformation that the greatest brands find vitality, purpose, and the power to change their world.
The issue for financial firms transcends the need to refocus claims around the customer; these firms must work to make material changes to the way they conduct marketing, to move from communication capability to integrating the investor experience. Reset rewards Evolving from a performance-based company and culture to solutions-based requires capability and mindset change – and won’t simply happen in an offsite meeting or e-learning module. Organizations that are serious about becoming more solutionscentric will embed that mentality into the way they do business and manage human capital. Competency models must change. Performance management will need to evolve. Compensation and bonus structures will be realigned to incent new behaviors. Putting the customer at the center is easy to say, but often hard to do. The only path forward is large-scale cultural transformation – a shift away from the traits that long characterized these types of firms such as competitiveness and control, and a doubling-down on things like innovation and collaboration.
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This paper is based on a five year quantitative and qualitative study beginning in 2008. The study included interviews with Boards, CEOs, and leadership teams of some of the largest financial service institutions in the world. These interviews were supplemented with deep global quantitative analyses, longitudinal financial and brand analyses, and business reviews of financial service institutions in over 30 markets around the world.
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