Retaining clients in times of stress
The quality of client servicing is an important factor in any relationship between a client and a supplier, but it is a secondary one. What is most important in any type of client relationship is that the supplier meets the expectations of the client with regard to the client’s primary objectives.
For example, the quality of client servicing is an important factor in the relationships between building societies and their clients, but the primary objectives of the clients will be associated with the interest rates on savings and mortgages. If the interest rates offered by a building society are the best in the market by a long way, clients will tolerate lower levels of client servicing. Stress enters into client relationships when there is a failure to meet the clients’ primary objectives. When stress enters into client relationships, clients focus more attention on secondary factors such as client servicing. In investment management, the primary objective of clients is investment performance.
Different types of clients may differ in terms of what they want their investment manager to deliver, but it all comes down to investment performance. For example, a pension fund will be primarily concerned with ensuring that its long-term liabilities to pay pensions can be met taking into account the effect of inflation. On the other hand, a private individual may want to ensure that an investment will generate sufficient income to pay school fees. Anyone who has worked in investment management for any length of time knows that investment performance is variable over time. Therefore, there will be times when the relationships between investment managers and their clients will come under stress. At these times, the quality of client servicing will become central to the relationship.
When an investment manager fails to meet a client’s expectations, with regard to investment performance, they need time to turn the situation around and improve the performance of the portfolio. Excellent client servicing can help to buy that time; but what is ‘excellent’ client servicing in the investment management industry?
The interview approach
One approach is to interview pension funds to establish what they regard as important in the relationships with their investment managers. These interviews may take place as research carried out as part of an intelligence service or as part of client audits that investment manager clients can engage a consultant to conduct on their behalf.
In the past 18 months, Investit have conducted over 200 interviews with pension funds. The following are direct quotes from some of these interviews:
· “If you have a real understanding of them and you have confidence in them, that will make it likely that you’ll stay with them even in periods when they are not performing very well.”
· “Past performance cannot be a guarantee of future performance, but it is a matter of not losing faith in people.”
· “Performance is not the main reason that we would leave a fund manager. For us, it has to do with the people and the processes. If both those are in place, we would retain them.”
· “We try not to react to performance as such but the people and the process. If they perform badly and we believe in them, then it is not a problem.”
· “If we still have confidence in their abilities, we wouldn’t leave them.”
· “If it is a short-term thing and the client liaison is admirable in terms of providing us with good explanations as to why they underperformed, then this will encourage us to stay longer.”
Analysing relationships
In analysing the relationships between investment managers and their clients, recurring themes are found in terms of what is important:
· confidence in people and processes;
· belief in people and processes;
· trust in people and processes.
Therefore, the key objective of client management is to generate confidence, belief and trust that will persist through periods of stress. The big question, of course, is how do you do that?
In order to answer this question, imagine being in the shoes of a UK pension fund trustee. The past 10 years have been a period of unprecedented change in our industry, and for pension fund trustees those changes have been dramatic.
The accountability of trustees increased just as the gap between liabilities and assets worsened. At the same time there has been a shift from balanced mandates to specialist mandates; in the 1990s pension funds typically engaged two to three different managers, now it is typical for them to engage five to 10 managers or, in the case of the larger pension funds, 15 to 20.
So, the pressures on trustees have increased significantly and the context in which they operate has become more complex. Clients want to see more, hear more and understand more about the management and administration of their funds than ever before. At the same time, there is more competition between investment managers. Over the past five to 10 years mainstream institutional investment management has seen an increase in the number of firms and in the types of firms, and a widening of the range of investment strategies.
All of this has resulted in significant changes to the dynamics for winning and retaining institutional business. Relationship management has become more complicated at the same time as it has become more important.
To respond to these developments, investment managers need to adopt a different, more broad-based approach to client management than was typical in the past.
The scope of client management extends to all interactions between investment managers and their clients. For example, the dispatch of an advice note should not be seen as a back-office task, it should be viewed as a client management task. However, with such a broad scope it is important to focus on the things that really matter; some aspects of client management are more important than others.
There are 23 aspects of client management that can be used to perform quantitative assessments of client satisfaction. Twelve relate to client servicing, eight to relationship management and three to both. The aspects most valued by clients are, in order of decreasing importance:
· implementing instructions;
· dedicated client relationship manager;
· valuation reports;
· access to the portfolio manager; and
· single point of contact for non-investment issues.
So, clearly, investment managers need to focus on these aspects of client management. Curiously, perhaps, many do not. Do the following examples sound familiar?
· There is often no central management control over the implementation of
client instructions. System support is weak and responsibilities are distributed right across the firm.
· Investment managers see valuation reports as a chore.
· Firms actively seek to restrict access to portfolio managers.
· Clients realise that managers are there to manage portfolios and cannot do that if client management becomes too onerous, but they do expect to have some access to the person taking investment decisions on their behalf.
Dissatisfaction
Research has also identified where clients are most dissatisfied with the service provided by investment managers. These areas are:
client reports; portfolio manager access; and proactive engagement by relationship managers.
These are the areas in which investment managers need to focus their attention.
Clients want better, more relevant explanations of performance. They want more scheme-specific, more client-specific presentation of information.
Reports focus too much on what has happened and not enough on predictions of what will happen. With regard to portfolio manager access, investment managers are failing to meet their clients expectations in that they want specific answers about investment style and strategy, about why or how they have changed or why they have not. Most importantly, they want access to the person making the decisions on their behalf.
However, it is important for the person to be articulate, able to communicate clearly what may be sophisticated investment strategy to ordinary people with no training or experience of portfolio management theory.
Viewing the whole experience
Investment managers are not engaging proactively with their clients in the right way. Because of the move towards specialist mandates, pension funds have less time to spend with individual managers than used to be the case.
It is not unusual for an investment manager to be given 15 minutes to engage with trustees, just three or four times a year. Therefore, investment managers need to engage with their clients in a more proactive way than was necessary in the past.
But perhaps the most important thing in client management is for investment managers to think in terms of the whole client experience because that is how clients think and that is how they judge their managers.
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