A decade after the financial crisis, the buyside (asset managers, hedge funds, institutional investors and large corporates) have changed at least as much as the investments banks that serve them.
These changes are not the mere result of new regulations, but the outcome of a fundamental rebalancing of the relationships between buyside clients and sellside banks and brokers:
- As banks became more focused, asset managers grew much bigger. Spread-ahead by the rise of passive investment, five firms (Blackrock, Vanguard, Allianz-Pimco, SSGA and Fidelity) now have now more than USD 2 trillion in AUM each. Not only they are everyone’s largest clients, they are very often the leading banks’ largest shareholders.
- More importantly, the buyside grew smarter. A lot of the ‘value-added’ activities such as designing investment and hedging strategies, or aggregating markets to ensure efficient price discovery, are performed by the buyside themselves, turning to the banks and dealers for the raw ingredients used to implement these strategies.
- Finally, with the end of the implicit subsidies that banks used to extend, the buyside is finally taking control of its own technology, overhauling and investing in its trading and risk management tools.
In essence, the historical asymmetry of relationship between the banks and large investors has inverted and the portfolio managers are now calling the shots over the traders.
This new balance of power has deep implications on the requirements and expectations placed on Corporate and Investment Banks by their clients. Specifically:
- Componentisation of Products & Services – Buyside clients want to be able to choose and procure simple and itemised financial instruments and services. Instead of asking for, say, a capital-protected note linked to the performance of a stock index, they want to buy a government bond and reinvest the coupons into call options, or instead of subscribing to a stream of aggregated FX rates, they want to source the underlying liquidity from as many providers as possible and do the aggregation themselves.
- Simplicity as the Ultimate Form of Sophistication – When the asymmetry was the other way around, investors had to cope with multiple touch points, interfaces, single-dealer platforms and client portals for each of their dealers that were imposing on their customers all of their internal idiosyncrasies and quirks. This is no longer accepted; banks must finally become simple to deal with.
- An End-to-End Service – As the buyside is also streamlining itself under competitive pressure and seek to optimise every step of its value-chain, banks must be able to truly offer end-to-end services, from research to trading, from trading to settlement and from settlement to asset servicing.
- Preferred Providers are the Ones that Dare to Disappear – Finally and counter-intuitively, the CIBs that want to truly differentiate themselves are the ones we are able to disappear. What it means is meshing their services within their clients’ own systems, moulding themselves into their customers’ workflows and, through the use of APIs, becoming part of the invisible fabric of the buyside firms’ infrastructure. This is how true relevance and stickiness is created now.
As the buyside has transformed itself and its demands change, the CIBs have to become of the digital plumbing sitting between investors and corporates on one side and the optimal allocation of risk and investment on the other.
Next week, we will be looking into what a digital culture means for CIBs.
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