investment banks: a client’s view - volume 1€¦ · investment banking clients of all types. •...
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CAPITAL MARKETS
Investment Banks: A Client’s View – Volume 1 In Depth Survey Report
Executive Summary
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Despite the global financial crisis of 2007-2008 and the scandals that have rocked the investment banking industry ever since, most investment banking clients have stayed with their investment banks and most would still recommend their primary investment banking provider.
These are among the findings that Accenture, working with the polling firm YouGov, has revealed in a survey of fund managers and corporate executives, designed to gauge their views on a range of services offered by investment banks. Which services are of greatest value? Which services are seen as a natural part of any offering? Which additional services are clients willing to pay the most to receive? These and many more questions were put to 100 respondents across the United States and the United Kingdom.
Among key survey findings:
• Clients are generally satisfied: The vast majority of investment banking clients would recommend their main investment bank to others, although one third of those surveyed have changed their main investment bank in the last five years.
• Risk management is critical: Risk management services in all forms – including reporting, advice, tools, and trading – are a clear priority for investment banking clients of all types.
• Basic services are still in demand: Investment banking clients value basic trading services, execution performance, and analytics, although this follows a five-year, low-volatility bull market in equities.
• Provision of research is still central to investment banking relationships: Research remains a core product, although standard written reports are valued far less than access to analysts or corporate executives.
• Asset manager clients value electronic trading. Most asset managers use electronic trading in addition to traditional channels, and often specifically to pay for research.
• Opportunity for improvement of institutional client portals. About half of asset managers surveyed said their bank does not offer a website sufficiently useful for day-to-day communications.
• There is interest in big data and analytics: Of the Social, Mobility, Analytics and Cloud (SMAC) technologies, analytics/big data is of the most interest to clients at present.
• Some clients have noticed service cuts: Some clients have noticed certain cuts in differentiated services that investment banks have been forced to make due to expense reductions.
• Coordination of service is important: Most clients value investment banks’ coordination of services – and it appears that a majority of banks perform this function well.
• Clients are well aware of regulation: Clients do understand the costs their investment banks will incur in complying with increased regulation.
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Basic Services
Choice of IB
Willingness to pay premium
Effic
ient
pro
visi
on is
key
Inve
stor
suc
cess
Enhanced Services
Written research
Ability to finance
Risk mgmtservices
Front office trading services
Tailored offerings
Corp access
1 to 1 analyst access
Analyst conf calls Trade
advice
Trade Process
Complex deal ability
Liquidity mgmt
Regulatorycompliance
Source: YouGov, Accenture Research
What offerings do investment banking clients expect, and which will they pay a premium to receive?
For more results from our survey of investment banks, read our specific papers on:
• Making research count
• Cross-product relationship management
• Electronic trading
• Digital opportunities
The client survey indicated that investment banking relationships are surprisingly stable and long lasting, but pointed to new challenges in the years ahead.
The years since 2008 have provided a recovery period for global investment banks, with a rising stock market and low interest rates supplying favorable economic conditions. This has allowed the investment banks to address their own challenges, including lower profitability and higher capital requirements, and to respond to significant regulatory changes.
During this period, clients have taken new interest in risk management services in all forms, including reporting, advice, tools and trading, as well as the determination of counterparty safety.
We see this in the answer to the first group of survey questions as shown in the figure below.
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0%
28%
24%
42%
54%
30%
66%
50%
54%
70%
76%
68%
66%
4%
30%
38%
40%
44%
54%
64%
66%
68%
72%
82%
84%
88%
Equity research
Lending or financing
Corporate advisory (M&A)
Foreign exchange
Debt and debt derivative sales and trading
Corporate treasury operations
Commodity and commodity sales and trading
Trade finance
Debt or equity issuance
Other research (debt / economics / commodities)
Working capital requirements
Equity and equity derivative trading
Other Asset/Fund manager
Corporate
Source: YouGov, Accenture Research
What investment banking services does your organization use?
Reflecting this focus on basic offerings, we found that for asset managers, equity trading was the most frequently used investment banking service; a topic which will be covered in detail in a separate paper. Services to support trading influenced a choice of bank, and enhanced services could attract a premium. The next most frequent answer was equity research, although there is clearly a difference between ‘use’ and be ‘willing to pay a premium to receive’. Next comes a series of straight forward banking services, lending, advisory, foreign exchange debt and treasury operations.
Using an investment bank strong in debt or equity issuance is only important to 40% of the asset/fund manager respondents. However, on a day-to-day basis, new issues are not necessarily key to their selection of an investment bank.
For corporate clients, of course, products such as equity and debt issuance, M&A, trade finance, and corporate treasury are highly used.
The findings also reflect clients’ more conservative approach to assets in custody, including their desire to protect unencumbered trading assets
and increased scrutiny of pledged collateral. It is worth noting that, during this period, strong market returns may to some extent have masked investors’ usual primary demands for lower costs and higher returns.
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What are the four most important factors influencing your choice of an investment bank for a product or service?
Research provided
Ability to tailor appropriate financial options
Trading/execution capabilities
Willingness to finance
Lack of any conflicts of interest
Existing relationship with individuals/bank
Deal execution abilities
Market expertise/knowledge of product or service
Market reputation for this sort of deal
Wide range of service o�erings (one stop shop)
Price
Expertise in a designated region Asset/Fund manager
Corporate
Source: YouGov, Accenture Research
24%
26%
26%
38%
18%
34%
16%
22%
32%
40%
46%
62%
14%
16%
22%
22%
24%
26%
26%
30%
42%
48%
58%
68%
Criteria for Choosing an Investment BankPrice remains an important consideration for clients choosing an investment bank. However, many other factors - including the research provided, the ability to tailor appropriate financial options, and especially provision of effective execution capabilities - also rank highly as decision-making criteria.
‘Research provided’ is the second most common criterion listed for investment banking selection. Although many banks have been paring down their research departments over the past few years, research remains a high-visibility core service, even if it is an area where clients are mostly unwilling to pay a large premium for better service.
Price is critical, but as many banks meet this criteria, other factors determine which bank gets the business.
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Basic offerings and premium servicesSurvey respondents were asked to indicate which services they would be willing to pay a premium to receive, and which services they saw as an integral part of a basic offering.
Risk management services were clearly the most valued services on offer, cited by 72 percent of fund manager respondents. This was followed by a group of trading related services, including the ability to rapidly complete trades (72 percent), execution price (68 percent) and when to trade (56 percent). Below these trading services were other services such as post trade analytics, research, and offerings such as regulatory advisory services.
A clear hierarchy of valued services seems to be emerging, starting with risk management and working down through a range of enhanced trading services. In spite of all the advances made in trading technology, clients are still willing to pay more to complete trades rapidly. Clients do not place a premium on processing services, perhaps seeing them as part of the basic package provided by an investment bank. Another important consideration is that investment banking clients increasingly expect and value cross-product service and coordination.
Access to research and research analysts was mostly seen as a basic service and was very unlikely to be a catalyst to switch providers. We were surprised at the low value given to access to senior corporate executives. Many investment banks have long felt this was a particularly valued service.
To what extent do you as a fund manager believe there is value in paying a premium for the following services?
Ability to trade rapidly (rapidly complete trades)
Ability to trade at best price
Trading advice – when to trade
Post trade analytics
Trading functions
Direct one-to-one access to research analysts
Clearing and Settlement
Prime Brokerage services, including margin finance, short cover
Trading advice – what products might be optimal to trade
Access to research services (analyst conference calls, financial models etc)
Provision of reports (holdings, trade positions, P&L, stock loan, risk, etc)
Access to senior corporate executives of the companies that research covers
Ability to execute complex trades
Liquidity management
Assistance with meeting regulatory compliance issues
Risk management services
Access to written research
Expect as basic service
Not a service we use
Will pay a large premium for better service – Value di�erentiating service
Will pay a small premium for better service
Source: YouGov, Accenture Research. Sorted by % large premium
32%
28%
28%
20%
16%
16%
14%
10%
10%
10%
10%
10%
10%
8%
6%
6%
6%
40%
44%
40%
34%
30%
30%
46%
46%
42%
40%
38%
28%
56%
56%
40%
38%
26%
28%
30%
34%36%
40%
38%
46%
42%
40%
44%
46%
40%
48%
34%
34%
46%
46%
2%
0%
2%
10%
10%
16%
10%
2%
4%
4%
4%
12%
14%
2%
4%
8%
10%
Front office services are more valued than processing services.
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Why clients change investment banks
In broad terms, 33 percent of those surveyed have changed their main investment bank in the last five years. This degree of switching of main accounts is very similar to that seen in U.K. retail banking, where Accenture’s surveys show that approximately 10 percent of accounts are moved in a year, and 25 percent are moved every five years.
This degree of switching may appear high, but it does not necessarily reflect a high level of dissatisfaction among investment banking clients. When asked if they would recommend their main investment bank to others, 37 percent said they would definitely recommend their main
investment bank and 59 percent said they probably would. The remainder said “don’t know”, while none of the respondents said they would not recommend their investment bank.
Some of the reasons for changing investment banks were unavoidable, e.g., that the banks have ceased to exist or have closed down services or offerings in key areas. These reasons, however, were cited by only 26 percent of those who have changed their main investment bank.Price was the top consideration, followed closely by the quality of product and quality of service.
For those that changed their main investment bank in the last five years: For what reason(s) did you change your main investment bank? Please select all that apply.
Clients are happy to recommend their bank to others, yet one third have switched banks in the past five years.
0%
13%
19%
25%
19%
44%
63%
69%
5%
14%
32%
32%
41%
50%
59%
59%
Better quality of products offered elsewhere
Better service levels offered elsewhere
Bank refocused services away from my firm’s areas of operation
Main relationship contact moved to a new investment bank
Main investment bank no longer exists
Willingness to use balance sheet on my behalf
Other
More competitive pricing offered elsewhere
Asset/Fund manager
Corporate
Source: YouGov, Accenture Research
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Clients’ Awareness of Investment Banks’ StrategiesWe have noted among our own clients that, while investment banks’ clients recognize the expenses that their investment banks are incurring due to increasing regulation, lower commissions and spreads are likely here to stay.
Our survey sought to find out where investment banks’ strategies have changed, for whatever reasons, and how technology is affecting the industry.
We asked: Are you aware of any changes to the corporate strategy being followed by investment banks where you have a relationship since 2008 that negatively impact the service offered? For example, changes in fee structures, reduction of services offered, and a lower volume of research. Fully 51 percent of respondents said they were not aware, 30 percent said they did not know, and only 19 percent were aware of such changes.
Of the minority of respondents who noted changes, half of fund managers said that fees for basic services had risen, half said that investment banks had reduced the amount of research they produced, and half said that service offerings had been reduced.
Trading Our survey asked about the number of separate business relationships that a fund maintained with different groups within an investment bank. While responses varied, a large number of trading desk relationships are maintained by a substantial number of fund managers, with 30 percent saying they have over 100 different trading desk relationships.
For fund administration and custody, fund managers sought to have a sufficient number of relationships so as to ensure competitive pricing and to cover any risks of a main supplier failing.
Investment banks have been altering their strategies and pricing policies to meet new market realities, a factor their clients accept.
How many separate business relationships does your fund maintain within the following groups?
1 to 49
50 to 99
100 to 149
150 to 199
More than 200
Don’t know
0 2%
8%
30%
20%
8%
2%
30%
Investment bank sales and trading desks (trading account in place)Median: 90
1 to 5
6 to 10
11 to 15
16 to 20
More than 20
Don’t know
0 4%
16%
38%
16%
4%
4%
18%
Investment bank research teams (regularly receive reports)Median: 8
1 to 5
6 to 10
11 to 15
16 to 20
Don’t know
0 16%
54%
12%
2%
2%
14%
CustodiansMedian: 2
Fund administratorsMedian: 4
1
2
3
4
5
6 or more
0 4%
4%
4%
20%
18%
18%
16%
Don’t know 16%
Source: YouGov, Accenture Research.
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Electronic trading is now the dominant form of trading across most investment classes.
We asked clients how the proportion of electronic trading of a range of instruments had changed since 2008. These instruments were commoditized (flow) equity derivative, commoditized (flow) fixed income derivatives, Cash Equity, Cash Fixed Income, Foreign Exchange and Commodities. In all cases, over half of respondents felt that electronic trading had increased.
We then asked about trading platforms themselves. Here we found opinions divided in roughly equal proportions over use of an IB-supplied (single-dealer) portal, versus multi-dealer portals. In all cases but equity derivatives, the plurality of respondents felt that the amount of usage of the two types of portals was the same.
How do you trade the following instruments?
Mostly electronic
Half and half Mostly traditional high-touch
Don’t trade these
Rather not say Mean % electronic trading
Block cash equities (10,000+ shares)
72% 20% 8% - - 73%
Cash equities (other) 56% 36% 6% 2% - 70%
Equity derivatives (listed options/warrants)
60% 34% 6% - - 67%
OTC Equity Derivatives 70% 24% 2% 4% - 70%
Foreign exchange 50% 38% 6% 6% - 68%
Commodities 50% 36% 6% 8% - 65%
Investment grade bonds 44% 48% 6% 2% - 63%
High Yield/ Sub investment grade bonds
54% 30% 6% 8% 2% 71%
Standardised (flow) fixed income derivatives
52% 36% - 12% - 71%
Interest rate swaps 50% 32% 4% 14% - 71%
Credit default swaps 46% 32% 2% 16% 4% 69%
Other fixed income derivatives 58% 32% 2% 6% 2% 73%
Source: YouGov, Accenture Research.
Source: YouGov, Accenture Research.
What proportion of your trading for the following instruments do you do through single dealer or multi-dealer portals?
Mainly single dealer (IB provided) portal
Mainly multi-dealer portals
Both the same Don’t trade these Rather not say
Standardised (flow) equity derivatives 40% 28% 24% 6% 2%
Standardised (flow) fixed income derivatives 18% 32% 40% 8% 2%
Cash Equity 12% 40% 46% - 2%
Cash Fixed Income 28% 24% 44% 2% 2%
Foreign exchange 26% 28% 38% 6% 2%
Commodities 4% 30% 54% 8% 4%
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Implications for Investment Banking Strategy
Over the last five years, investment banks have dealt with decreased revenues through cost reductions, while maintaining, for the most part, reasonably strong ties to their clients. Over the next five years, however, this picture could change dramatically due to a number of key factors:
• Deadlines for new regulatory frameworks, including Dodd-Frank and Basel III, come into play in the U.S. and Europe, requiring massive expenditures and large allocations of management time and attention.
• Banks’ investors are showing impatience with low investment banking returns on equity, at a time when investment banks need to make large investments to upgrade or replace entrenched IT systems and operating models.
• Market changes, including the entry of specialized players, are sharpening clients’ understanding and demand for better services, lower prices, and more targeted research and content.
• The ‘s-curve’ of digitalization can be expected to steepen, leaving behind players who have not leveraged digital technologies. To date, clients have not seen much benefit from SMAC technologies used by their banks, but client sophistication is increasing rapidly and the pressure on investment banks is building.
To succeed in this environment, investment banks will have to negotiate a challenging landscape.
One important concern for investment banks is that the IT development required to address regulatory concerns may have ‘crowded out’ other important, forward-looking technology investment. Clients, for example, value web portals and electronic trading across various products, but investment banking is lagging behind other industries in integrating electronic channels. At many investment banks, product systems are older, custom-developed, and focused on single products, making cross-product development in high-demand areas such as risk or collateral management complex and expensive.
Controlling costs remains an absolute priority, but so too does finding new areas of growth. Discerning where clients seek value, what services they expect as a matter of course, and what services and products they are willing to pay extra to receive, can give investment banks important insights in their strategic decision making – a topic we look into in more depth in our Top 10 Challenges for Investment Banks 2014 program (www.accenture.com/10challenges).
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This survey was conducted in July and August 2013 through telephone interviews with senior users of investment banking services: fund managers, asset managers, pension funds, hedge funds and non-financial corporations. A total of 100 respondents were interviewed, 50 in the UK and 50 in the US, equally divided between fund managers and non-financial corporates. The responding sample is not weighted in any way.
Methodology
AuthorsDean Jayson Managing Director [email protected] +44 20 7844 8295
Jonathan Firester Managing Director [email protected] +1 917 452 2332
About AccentureAccenture is a global management consulting, technology services and outsourcing company, with approximately 289,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013. Its home page is www.accenture.com.
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