This article is the third of a continuing series of reports on the state of the global defined contribution marketplace.
As a closing chapter to this aspect of a dynamic subject, the author promised to offer some specific products, services, and concepts that he believes would play well in the European DC marketplace. Given the many conversations, e-mails, and phone messages that resulted from the first two articles, it seems that professionals on both sides of the pond are looking for similar answers to the same basic question - "How do I get into the game?"
In approaching the question, I am reminded of an old business mentor who said that there were only three ways to add value - as a means of creation, production, or distribution. He further opined (he did that a lot) that you must differentiate your offering from a pack of similar alternatives (the commodity effect).
To do this, you must create, produce or distribute in a manner that is demonstrably better, faster, or cheaper than the other guy or gal waiting in the prospect's office. If you don't have some incrementally greater value in one of those three areas, you will not be successful.
Let's take that thought into the analysis of the question, here are some facts, opinions, and suggestions:
FACT #1 WE HAVE SOMETHING TO OFFER
Certain products, practices and processes that we take for granted are not generally present in the European marketplace.
OPINION: From the US toolkit, there are certain key technologies and business solutions that will have substantial appeal to European vendors and plan sponsors.
SUGGESTION: Take a look at the needs of European customers for localized versions of:
§ Efficient and flexible daily valuation recordkeeping and trust/custody systems,
§ Cross fund trading and settlement (products, systems, services),
§ Marketing and sales technologies (web, print, media), including cross-selling,
§ Employee education and communications (new media, self-service and traditional methods),
§ Investment advice for plan participants.
FACT #2 IT'S A GROWING MARKET
Europe's defined contribution assets are expected to grow at a much higher rate than for defined benefit assets over the next few years. Further, both types of asset are expected to grow at a rate greater than in the US.
OPINION: There is a great deal of opportunity, but there are many distinct and separate national markets within the European region.
SUGGESTION: Start with a market that you can access easily (like the UK). Find a need that you can solve with your product or service. Do some research. A case in point is the IIR Defined Contribution Conference coming up in London, to be held July 14th & 15th. You can take advantage three ways:
§ Attend the event and enjoy two days of condensed info on UK practices, procedures and opportunities. See your peers, prospects and competitors up close and personal.
§ Stay home and buy the workbook. Not as much fun, but a smaller investment.
§ Make friends with a consultant who will be there (yes, the author will be in attendance and is a featured speaker at the event).
For additional conference details, give me a call at 800-638-8121 or e-mail at email@example.com
We have arranged a discounted entrance fee for readers of this column.
FACT #3 IT'S A COMPRESSED MARKET
The old 80/20 rule seems to hold true in European money management. A relatively small number of money managers control a disproportionate share of retirement assets. An annual survey by HSBC James Capel shows that 80% of UK pension assets is managed by only 20 organizations and more than half of that is managed by just 6 of those. The same may hold for administrative services, as long term relationships seem to hold sway.
OPINION: If you are going to compete for shelf space, you will have to clearly, concisely and consistently communicate your value proposition (see better, faster or cheaper above).
SUGGESTION: Again, do some basic research and learn how/if you can add value and compete. The leading professional group I've found is the UK's National Association of Pension Funds Limited
(NAPF). It is a great organization that provides outstanding conferences and training materials. More information can be had at www.napf.co.uk
FACT #4 WE HAVE SUCCESSFUL MODELS
US-based vendors are entering and prevailing in the European marketplace. Fidelity
is the subject of a very good article in Fortune dated April 12th. There are other examples if you know where to look.
OPINION: The European marketplace will welcome those who adapt US products and services that add value.
SUGGESTION: Take a look at two of the successful market players -
- Dublin/London-based HCM International. A consulting firm created as a spin-off from Howard Johnson & Company in the US, HCM has localized the technology platforms originally built by HJ for the US market and adapted them to use in the UK and Europe. HCM's Chief Executive, Brendan O'Farrell, formerly one of the Principals of HJ in the US, had many years of experience consulting with multinationals in the UK and Europe on a variety of retirement and other compensation and benefit issues. Brendan recognized the coming DC market opportunities in Europe in the early 90's and set up shop in London and Dublin in 1994. HCM offers US-style plan administration and reporting, employee service, and member (participant) education services, fully adapted to local requirements, to mid-sized and larger plan sponsors. This includes daily valuations, on-line access for participant directed transactions and reporting, and interactive computer-based education and retirement needs modeling for plan participants. By late next year, HCM plans to have Web-based access available to plan participants in the UK: www.hcmintl.com.
- Barclays Global Investors (BGI). BGI has a comprehensive strategy for global distribution of their DC products. In addition, their US team contributes the sales and marketing muscle of former Fidelity pros, including Richard Malconian, formerly President of Fidelity Investments Tax-Exempt Services Company. With strong leadership from its San Francisco headquarters, BGI is well versed in US and global retirement issues and will no doubt bring strong support to BGI's marketing and product development efforts, as the world's largest institutional asset manager. Though best known as an index-based manager, BGI offers a range of highly risk controlled and cost efficient techniques to institutional investors. A case in point is their recent capture of a £ 460 million fixed income assignment for the UK-based Dock Workers Pension Scheme. That's about $749 million at today's exchange rates. www.barclaysglobal.com.
FACT #5 THIS IS JUST THE BEGINNING
Several pundits in other trade press have suggested that Europe is far behind the US in attributes (broad choice, bundled services, participant empowerment and selection) that led to our current participant-focused, US defined contribution marketplace.
OPINION: Europe's marketplace of today (products, services, relationships and preferences) will evolve like it did in the US in the late '80s. Remember the old days when participants would walk into HR and demand that funds (usually Fidelity) be added to the menu? E*Trade
, and a host of others will lead plan participants (and plan sponsors) to higher levels of control, choice and service. The head of Societe Generale
's on-line brokerage unit anticipates 10 million cybertraders in Europe within two years.
SUGGESTION: Sell ahead of the need. Position yourself now as a value-added solution for local vendors, plan sponsors and participants. Invest in the long haul and find distribution for your localized offering. Be prepared to build, buy or borrow a presence. Its like elementary school: be nice, share your toys and play well with others.
The level of investment required is substantial. This is not for the faint of heart. US firms should not underestimate the complexity of local requirements and, particularly in the UK, the regulatory climate is challenging. Entry to foreign markets is expensive, but for many, the rewards are worth the risk of capital.
FACT #6 WE CAN LEARN FROM THEM
Just because the European model differs from our own, it doesn't mean that either one is inherently superior.
OPINION: Whistles, bells and features do not necessarily equal value added. My exposure to European middle-market pension plan sponsors suggest that they may pay closer attention to the net, service-weighted and risk-adjusted cost of their defined contribution plans than do many US sponsors. They also tend to view both DB and DC plans through the same lens, unlike many US sponsors who have bifurcated responsibility between finance and human resources.
On balance, UK plan sponsors and trustees seem to be ahead of the US in that they are resistant to loading up participant assets with investment and administration costs to the detriment of the long term investment returns on those asses. Those expanded service features carry a cost.
SUGGESTION: Ask a US plan sponsor (or yourself) "What is your net, service-weighted and risk-adjusted cost of defined contribution services?" I am willing to bet a tall Guinness that a UK sponsor is more likely able to answer the question accurately. Of course, if I am wrong, you will have to come to London to collect.
Good luck and happy trails.
Ward Harris is Managing Director of McHenry Consulting Group. They help to create and deliver successful products and services. They serve investment/benefit vendors, corporate clients, and employee groups. His e-mail address is firstname.lastname@example.org.
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