The phrase “the age of asset management” was coined by the Bank of England’s executive director for financial stability Andrew Haldane in April 2014 to highlight the growing importance of banks’ investment businesses. 

Since his London Business School speech the trend has only intensified. McKinsey found that the percentage of group revenues generated by asset management at the largest bank-owned managers has more than doubled in recent years and that these divisions now account for around 11% of group profits.

Cerulli analysis of European mutual fund assets under management between 2011 and 2015 indicates that the balance of power between independent managers and bank-owned managers in terms of assets has narrowed over the last five years. In 2011, the split was 33% independent to 66% banks (€1.7trn to €3.4trn). Since 2012 the captive percentage has never risen above 58% and the totals for 2015 were €2.8trn and €4.9trn respectively.

However, this broad trend masks significant volatility and the emergence of a more recent trend for bank-owned managers to recover market share. In 2011, independents took in €47bn in new money while banks saw €124bn go out the door. Banks recovered assets in 2012 and 2013, but net new flows were still below those to the independent managers. 

However, in 2014 the roles were reversed, with banks attracting more than twice as much new money (€256bn compared with €112bn) and that gap widened appreciably last year, when banks took in €255bn and independents just €72bn.

These asset class differences are exacerbated when it comes to net new flows. So while independent managers attracted most money into mixed assets and equity last year and saw €10bn in outflows from money markets, money markets were the second-most invested category for banks, behind only mixed assets.

Analysis of comparative returns shows that independents and bank-owned managers achieved almost identical returns last year, if the comparison discounts property. 

While independent managers achieved 10% higher performance in 2015 they were also riskier, with a higher average Sharpe Ratio. Independents are also more expensive, on average, than funds provided by banks, which can be at least partly explained by the latter’s more extensive distribution networks.

Bank-owned asset managers are sensitive to criticism that they promote their own funds at the expense of those from external managers. 

While in December 2015, JPMorgan Chase agreed to pay more than $300m to settle accusations that it improperly steered clients to the company’s in-house mutual funds and hedge funds there is scant evidence for the widespread adoption of the practice. 

It is the only major bank to be punished for inappropriately favouring its own funds and even impartial observers acknowledge that in-house products are not always a bad choice for clients.

Bias towards internal funds is inevitable, suggests Scott Gallacher, a chartered financial planner at Rowley Turton. “For example, in many banks’ private client or discretionary fund management portfolio the UK banking sector is represented by shares in that bank rather than those of a competitor.”

He suggests that the guide architecture sales model (which is generally a restricted or panel approach that focuses on a limited range of funds in a specific sector) isn’t necessarily damaging for investors. 

However, that depends on the principle behind the guidance – it would not be a concern if it is just to avoid clients being placed in inappropriate, expensive or poor funds. 

Gallacher says the performance of some captive funds does not inspire confidence, referencing Halifax Corporate Bond, Scottish Widows UK Growth and Santander UK Growth as examples of funds that have significantly underperformed both their peers and their sector. “I struggle to see the benefits for clients of using anyone other than a truly independent financial advisor,” he adds.

Comparisons unlikely Buckingham Asset Management director of research, Larry Swedroe, says it is unlikely that clients are offered like-forlike comparisons of all products and is also sceptical of the value of setting quotas for the number of external funds banks promote and/or sell. 

But chartered financial planner Danny Cox observes that Hargreaves Lansdown’s investment platforms promote a mixture of in-house and external funds. “Charges are detailed in the same way on our website and literature so clients can easily make likefor- like comparisons.”

When asked if there is any evidence that top-selling captive funds underperform funds from the same genre sold by independents, he notes that since 90% of active funds underperform their benchmarks after fees, the chances are that at least some of the funds sold by banks will fall into this category.

A spokesperson for Allfunds Bank accepts that distributors with proprietary fund factories have a conflict of interest. “Offering the best to your client should be the main driver and this leads most of the time to external funds.” 

He says the bank’s clients are offered like-for-like comparisons of all products, although there are some asset classes where this does not happen very often as the marginal difference is too small, for example money market funds. 

“It remains to be seen whether MiFID II encourages banks to focus more on in-house products, but it is reasonable to assume that banks would build up portfolio solutions in different formats such as discretionary fund management services and multi-asset funds,” he adds.

Aymeric de Poncins, head of investment funds advisory at BNP Paribas Wealth Management says there are robust mechanisms that ensure his bank promotes all funds equally. “We have a global and common fund selection from which the wealth management entities make their local selection,” he explains.

“We follow equivalent processes for selecting in-house and external funds: due diligence and assessment of the capacity of outperformance versus peers and the market.”

Quantitative criteria are applied equally to all funds in order to protect clients, de Poncins adds. “The same criteria of relative performance are applied to in-house and external funds to maintain the quality of the selection and there is no fixed proportion of in-house funds. The priority of the selection is to address the various needs in advisory – style, turnover and conviction.”

For customised investment proposals a choice of products presenting the various features of style is offered. de Poncins says BNP Paribas Wealth Management is able to provide a justification or a comment on its reasons for the selection at any time. 

“As advisors we provide a guided architecture in an open architecture context. Thus, we provide a coherent selection dedicated to an advisory use that is constantly monitored.”

BNP Paribas’ de Poncins agrees with the Allfunds Bank view that it is too early to speculate on the structure of the market that will emerge from the implementation of MiFID II. 

“Secondary effects could include more focus on in-house products and changes to the balance between active and passive funds or the importance of added value and service related to the asset allocation in the product offering,” he adds. “MiFID II will help the industry better structure the advisory activity to the client in the context of a revamped and transparent pricing environment.”