Compelling statistics highlight the differences in the economic value of service quality in institutional markets
Asset managers should focus their attention on relationship management if they want to retain clients in times of challenging financial performance.
In a study1 conducted with a leading global consulting firm, we find that when considering customer satisfaction, financial performance isn’t everything. Good customer experience (CX) can compensate for lower returns.
Figure 1 illustrates the outcome of this research. It shows an overall customer satisfaction rating depending on financial performance and customer experience, against a scale of 1 to 10 (the median over the past two years is 7.7) and displaying share of mandates in percentages.
When observing a sample of the most recent reports on active mandates, the asset owners reporting fell into three groups, which we refer to as ‘happy’, ‘OK’ and ‘unhappy’ clients.
Our findings suggest that good customer experience is necessary to achieve best-in-class customer satisfaction, and excellent client experience leads to higher customer satisfaction, independent of financial performance.
In times of low financial performance, however, client experience perceptions are vital and can even compensate for poor returns.
But what is client experience and how can it be improved? As previously stated, relationship management is one of the underlying factors that affects client experience.
If superior client experience compensates for weak financial performance, what are the decisive factors of client experience?
We applied regression analytics to our data to establish the elements that most influence client experience. Of the eight value-chain categories that we measure, four are more likely to influence customer experience and act as a differentiator. Four appeared to be ‘hygiene’ factors – areas where an asset manager should provide services to an expected market standard. Beyond that, clients do not appear to value excessive investment. These categories are reporting, in-house research, valuations and benchmarking, and risk management.
The four categories that show room for perceived differentiation – or where potential investment would be wisely spent – are operations, ESG, value delivered and, with by far the highest potential impact on client satisfaction, relationship management (figure 2).
The times when relationship management consisted of wining and dining are no more. Organisations focus increasingly on good governance as regulatory compliance tightens.
Our data show that investors are now looking for the relationship manager to understand their needs with sufficient technical know-how.
Other differentiating factors are also related to the integrity of the working relationship, such as the ability of an asset manager to adhere to its stated investment process and to meet the investor’s needs for smooth operational workflow.
ESG is an area where asset managers can distinguish themselves, with engagement capabilities and adequate reporting of high importance to institutional investors.
It would be prescient for asset management firms to reassess the potential value created by investing in client experience, and particularly in relationship management, to ensure they are fully meeting their clients’ needs and building long-lasting working relationships.
Who can afford not to offer superior client service?
Our research also highlights the differences in the economic value of service quality in institutional markets. Further to the significance of relationship management and superior CX as key drivers of satisfaction for institutional investors, we now examine the relationship between CX levels and average mandate size.
We observed a live sample of more than 3,000 mandates within a two-year rolling timeframe, which were distributed in three groups of CX (low, medium and high).
1 The study is based on INSTICUBE’s collected data. Altogether there are over 2.5m data points concerning the value and service provided by over 550 asset managers from 700-plus of the largest 2,000 European institutional investors over the past seven years. They collate this data to provide benchmarks, ratings and risk moni- toring reports for asset owners, and client gen- erated insights for asset managers. INSTICUBE also regularly analyses the collective data to produce reports on asset allocation trends and leading indicators for institutional markets.
We started by looking at the mandate size differentiation of service providers in the inferior (low) and superior (high) CX categories, in comparison with those categorised as median (medium) CX players.
Looking across all asset classes, we found that the median mandate size was €64m for low CX levels, €82m for median CX levels. High CX mandates had an average size of €113m. Therefore, for high CX, the median mandate size is about €50m (78%) higher when compared to low CX and €31m (38%) higher when compared with median CX.
Figure 3 highlights the distribution of client experience per mandate size. We now take this a step further and consider the bottom-line implications.
We assume an average profit contribution across all asset classes of 10bps. Given the observed client behaviour, the superior CX providers are realising 38% more revenue than the medium providers. Low CX service providers would earn almost 28% less when compared to the medium provider. In absolute terms the increased profit contribution per mandate is €31,000 annually.
Carsten G Eckert is CEO of INSTICUBE GmbH. IPE International Publishers Ltd holds a financial interest in INSTICUBE.
INSTICUBE is a highly educative research platform offering asset management firms the tools to better understand what their unrealised potentials are. To learn more, contact firstname.lastname@example.org