THE BLOG
11/12/2014 03:56 pm ET Updated Dec 06, 2017

Big Banks Must Dare to Think the Unthinkable

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It is about time the role of asset management, also known as investment management, within big banks be reconsidered.

My proposal is a business model for big banks that will ensure a truly independent and conflict-free asset management, free from the influence of the bank's House View.

My suggestion is not driven by regulatory or political interests that also came with the "too big to fail" idea. Instead, it comes solely from a desire to create added value for customers and, consequently, also for the financial institution.

The clear objective is and must be, to improve the quality of services and competitiveness of large banks.

A more radical proposal is to think the unthinkable and spin-off asset management, using only various best-in-class independent asset manager partners. The big banks would then put the focus on private banking without in-house asset management.

Some banks have already made their asset management business independent of the bank group through spin-offs. The reasons for spin-offs are to protect banks from unforeseen events, to strengthen independence credibility, to reposition the bank, or to raise bank valuation.

However, major banks should ensure that a high proportion of asset management services does not come from the spun-off unit. And only then can real diversification, a so-called 'true' open offering architecture, take place.

For smaller banks, however, this constellation without in-house asset management often already exists but is mostly driven for two main reasons.

First, some banks have consciously decided against maintaining or owning an asset management unit and, therefore, rely on spun-off partners or external partners. Secondly, the others are missing, besides the necessary expertise and infrastructure, simply, the competitive edge.

The radical proposal with not owning an asset management unit can perhaps be ignored by big banks if they can show credibly that their asset management always acts independently and autonomously in their investment decisions.

However, even then, an independent asset management as a truly separate entity is always the more credible business model. In addition, the in-house excuse that asset management performance has suffered through the house view will not hold true anymore.

With independence, the asset management must face tough competition, and that will benefit the clients and also itself.

The sharp focus on core competencies and strengths is the secret of successful companies such as Apple, Google, or Facebook. It is there where the secret of the future of big banks lies.

Apple stands as a good example of how successful the outsourcing of some of its key production elements to its best-in-class partners, sometimes even with main competitors such as Samsung, can be. Apple focuses on its core competencies and assigns the rest to its strategic, outsourcing partner.

In this proposal, I shall only discuss the advantages of large banks, which see their future in the private banking business model without their asset management.

A financial institution will continuously grow assets through its new success, become stronger, and add corresponding and specific know-how, from which customers will increasingly benefit.

Furthermore, clients will also benefit from having access to the best asset managers and the best research. These are benefits that cannot be easily replicated by most clients.

The clients benefit because they will most likely enjoy, due to the independence of the asset management firm, better best-in-class products and services and thus achieve higher returns in their portfolios.

The disadvantages for a big bank to not own and control an asset management unit lie in lower risk control and lower income through the use of third-party providers. However, the overall benefits for the bank outweigh the disadvantages.

The bank will be perceived by clients as a useful and necessary long-term advisor and thus form the basis for a reliable and trusted relationship. In addition, the brand will strengthen.

In order to strengthen the banking business model for some big banks, it begs the question whether the current strategy with the given structures of in-house private banking and asset management will result in potential sustainable future growth.

Competitive or preferably outstanding returns are the key factors and drivers that decide the success or failure of the asset management business model.

What asset manager would go to a restaurant where the food - speak performance - is not good, even if it has a great reputation or name attached to it? They might visit it once more, but if it disappoints again, never again. The consequences of word-of-mouth effect can be imagined.

Banks should decide either to take the banking role or the asset management role. Only then will the big banks and asset managers play to their strengths and succeed together.

Successful new economy companies like Facebook, Google, Apple, or Amazon have recognized early on the need to focus on generating innovation within their consciously narrow niche competence boundaries.

This proposal may sound radical, but the approach to thinking the seemingly unthinkable is consistently pursued.

"To achieve the possible, we must attempt the impossible again and again."
- Herman Hesse