INDONESIA: CREDIT CARDS & ACQUISITION MARKETING

Excellent Wall Street Journal story that we can relate to one the key aims of acquisition marketing: cross-selling! By Eric Bellman (WSJ, 6 March 2013):

 

JAKARTA, Indonesia— Until about four years ago, Rusmani, an administrative assistant for a Jakarta electronics company, didn’t even know what a credit card was. Today she has 13.

The 28- year- old Ms. Rusmani— like many Indonesians she goes by only one name— earns less than $ 1,000 a month. She got her first card in 2010 from PT Bank Central Asia because the salesman offered her a free appointment book and told her that the card gets her free drinks at her favorite coffee shop, Starbucks. Since then, she has been regularly contacted by all of the 20 banks that offer cards in Indonesia. They call her on the phone, they come to her office and even show up at her home, she says, once with a birthday gift.

Her card collection is so big now that she has to carry two wallets. “Maybe the banks think I’m rich,” said Ms. Rusmani, as she pulled out her latest card—still unsigned and unused—from the envelope it was delivered in. Credit cards are just taking off in Southeast Asia’s largest economy, and the high interest rates banks can charge make the business particularly profitable. The number of credit cards in Indonesia has jumped 60% in the past five years to around 15 million last year, compared with a population of close to 250 million. The value of transactions through cards has almost tripled to around $ 21 billion.

The intense competition for millions of potential customers, though, is creating a new class of card holder—one who carries 10 or more cards just for the freebies and discounts they promise.
Ms. Rusmani says that her PT Bank Negara Indonesia card gets her 50% off at Pizza Marzano, her HSBC Holdings PLC card gives her free movie tickets, her Australia and New Zealand Banking Group Ltd. card grants her a 10% discount on gasoline and her PT Bank Permata card provides 15% off her grocery bill as well as some flights. By spending around $ 100 a month on her different cards, she estimates that she gets close to $ 40 in discounts.

The plastic perks have been so successful at boosting business that the central bank slapped new restrictions on cards this year, concerned the marketing blitz could trigger a debt bubble. The restrictions will force millions of people to give up some cards, according to industry estimates. They also could derail the plans of card companies like Visa Inc. and MasterCard Inc. and big global banks like Citigroup Inc., HSBC and Standard Chartered PLC, which were targeting Indonesia as one of the last great untapped markets for them.

Banks say that while they usually lose money on the discounts, they can make up those losses many times over if the card holder starts regularly using the card, paying more than 35% a year in interest on their balances. Steep discounts to encourage consumption on credit happen in other markets as well, including China and Brazil. Card issuers say they spend more on these kinds of promotions in emerging markets to be known to consumers as card use takes off. Indonesia still has a credit-card penetration rate of less than 15%, compared to more than 25% for Malaysia and Singapore, said Heri Gunardi, executive vice president and coordinator of consumer finance at PT Bank Mandiri, Indonesia’s largest card issuer.

“Our population is very big but [card] penetration is still low,” said Santoso, senior general manager and head of consumer cards at Bank Central Asia, one of Indonesia’s largest card issuers. “And the margins are still very high, which is why we can afford these promotions.” But the archipelago’s central bank, Bank Indonesia, is worried. The authorities are concerned that inexperienced banks and borrowers could trigger a credit-card debt bubble like the one seen in South Korea in 2003, when the government’s crackdown on credit cards resulted in a decline in consumer spending. While Indonesia’s nonperforming loan rate from credit-card debt has fallen in the past four years to around 3.5% last year from around 9% in 2009, the central bank says it doesn’t want to take any chances.

“Although our stress tests didn’t show any bubble, we don’t want a credit- card crisis,” said Boedi Armanto, Bank Indonesia’s head of accounting and payment system department. He said some banks at times offer cards to customers without finding out how much the people earn, which could lead to problems. Starting this year, cards can only be issued to people who are older than 18 and earn more than $300 a month. The combined credit limit isn't allowed to go beyond three times the card holder’s monthly salary. Meanwhile, anyone making less than $1,000 a month will only be allowed to hold two cards.

Because of the new rules, as many as four million cards will have to be canceled this year, said Steve Marta, general manager of the Indonesia Credit Card Association. As millions of multiple card holders this year decide which two cards to keep, the perks and discounts may only get more generous. “It will be more competitive now because banks are pursuing the same group of people trying to hold on to their customers,” Mr. Marta said. Ms. Rusmani says she doesn’t mind thinning out her deck of cards as long as she can keep the two that give her the biggest discounts. “If I don’t get a discount then there is no reason to use a card,” she said.
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Let's Look at Some Ads

SPONSORSHIP!

AM | @MackinlayEuruni


[1] Baillie Gifford. Indispensable WHO WE ARE page. Note the use of the most elementary branding technique: differentiation. Brand image promoted by the company: Nerdy. VIDEO (to 1:40 only): “The Genetic Understanding of Disease”. Art Fashion Show VIDEO (to 0.40). Cause Sponsorship: Habitat for Humanity.



[2] KBC. KBC sponsors the Rock Werchter Festival [see]. Watch the VIDEO.



[3] Deutsche Bank USA 2012 Sponsorships (click on this one). Another page: Fostering Creativity see. DB Art Collection see. Community Arts Grants see. Artist of the Year. Yto Barrada, 2011 [VIDEO to 1:26]. Roman Ondák, 2012 [VIDEO]. Main Sponsor: Frieze Art Fair [see]. 



[4] Pictet see.



[5] ING USA. Sponsorship: New York City Marathon [see]. The analogy between retirement planning and running.



[6] UBS. The Who we are page. Sponsorship policy see. Sponsorship:Yo-Yo Ma / Stott [VIDEO]. (A note on sponsorship eligibility at Royal Bank of Canada).


[7]  Carmignac Gestion Art Collection see. 



[8] VTB. The WE page see.  


[9] Credit Suisse Sponsorship. The WHO WE ARE statement see. Roger Federer see. See FLASH BANNER, Online advertisement. VIDEO: STUDIO SESSION WITH RACKET STAR ROGER FEDERER.



[10] Barclays current account customers get 2 chances to win Barclays Premier League tickets see


[11] Man Booker Prize [see]. VIDEO Man Group (see). "Community", "innovative", "corporate responsibility", etc.


[12] DnB VIDEO see

[13] ASB Bank VIDEO see. More ads here


[14] Twitter @ArtMag_DB. Interesting idea, but little investment. Very few interactive elements: no RTs, no FF, no hashtags, no conversations, follows only 5 accounts. The result: only 720 followers; @ManBookerPrize. Already tweeting today. Lots of interactive elements: 16,324 follower! @INGRunnerNation. Lots of nutrition and training tips for runners. Also in FB. Very few RTs, but lots of hashtags and conversation. Links to videos as well. 10.785 followers! @PrixPictet. Already tweeting today. Some RT, hashtags and conversation. Engages with the twitter audience: if follows 930 people. 2,295 followers

@MorganStanley. Look at the account: only 5,742 followers! They do not follow anyone; there are no RTs and no conversations. @GoldmanSachs. Although it has more followers than rivals Morgan Stanley, Goldman Sachs uses the Twitter account mostly as a tool for brand repair (see Session 4).

@JimCramer. A former hedge fund manager turned TV commentator, Jim Cramer is the main shareholder of the internet market advisory firm TheStreet.com. His Twitter account has 559,361 followers! @DougKass. A hedge fund manager (Seabreeze Partners), Doug Kass is also a market advisor. 45,179 followers. Almost 8 times as much followers as Morgan Stanley. Kass does not need to worry about conflicts of interest; on Twitter, he publishes his views on markets and he often informs followers about his positions in real-time — which would be unthinkable at regulated investment banks. @economistmeg. Megan Green, a very successful adviser.


@KeithMcCullough. Founder of Hedgeye, a market advisory services company. Aims at a clear differentiation with traditional Wall Street firms (the “Old Wall”). Services offered to investors and market professionals interested in an active –very active– management style. 17,565 followers. No Twitter, no Hedgeye.
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BRANDING!

AM | @MackinlayEuruni

. American Express's simple, yet powerful presentation WHO WE ARE -- WHAT MAKES US DIFFERENT. Those are exactly the two key elements of branding: defining one’s identity, and laying out what makes the company different from the competition.

. VIDEO: Carmignac Gestion at Place Vendôme

. Brandirectory publishes a yearly study of the Best Global Brands. See the 2012 edition. Here’s the table for the Banking 500 2012; Diversified Financial Services 2012 [see]. The methodology involves a discounted cash flow analysis of “brand earnings”, which are estimated by substracting any revenues from license fees.

. CNN-Fortune: The World’s Most Admired Companies. Hay Group has collaborated with FORTUNE annually since 1997 to identify, select and rank the World’s Most Admired Companies and uncover the business practices that make these companies highly regarded among their peers. To compile the rankings, corporate reputation and performance are measured against nine key attributes: innovation, people management, use of corporate assets, social responsibility, quality of management, financial soundness, long-term investment, quality of products and services, and global competitiveness.

. YouGov's BrandIndex is a daily measure of brand perception among the public, tracking many brands across multiple sectors simultaneously.

. The great vampire squid! (Also: banksters instead of gangsters).

. Some Goldman Sachs governance principles.

· August 2012. The new and imposing WHO WE ARE banner!!! 100% BRANDING!!! And it says: THRIVING ON DIVERSITY.

. Two Twitter accounts: @GoldmanSachs and CreditSuisse.

. Giselle Bündchen and Banco do Brasil: link.
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ESG

. Allianz: an ESG Board [see]. "Promoting sustainable business by incorporating ESG principles in our insurance and investing activities is not just the right thing to do; it gives Allianz a competitive advantage in the market".

SAM: SUSTAINABLE ASSET MANAGEMENT

SAM is a global investment boutique focused exclusively on Sustainability Investing. The firm’s offering comprises asset management, indexes and clean tech private equity. SAM partners with Dow Jones Indexes in the publication and development of the Dow Jones Sustainability Indexes (DJSI). Founded in 1995, SAM today has more than 100 employees and belongs to Robeco, a subsidiary of the Dutch Rabobank Group.

. The SAM Sustainable Agribusiness Equities fund (in €) [VIDEO]. Launched in Luxemburg in 2008; 1.5% annual management fee [see]. Focuses on companies providing inputs to agricultural production such as seeds and feed, fertilizers, agricultural equipment or providing intelligent irrigation technologies, all of which can contribute to higher, more sustainable agricultural productivity.

. The SAM Smart Energy Fund [see] [VIDEO]. Launched in 2003 in Luxemburg, the fund invests globally in companies offering technologies, products and services in innovative energy technologies. Therefore, this theme fund focuses on four key segments: renewable energies, natural gas, distributed energy systems and energy efficiency. The fund’s benchmark is the MSCI World Total Return Net; 1.5% annual management fee.

.The SAM Sustainable Water Fund [VIDEO]. Launched in 2001 in Luxemburg, the SAM Sustainable Water Fund invests globally in companies offering products and services along the entire value chain of the water industry. In EUR, CHF, USD; 1.5% annual management fee.

Resources: International Corporate Governance Network; Course on ESG [see].
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SEGMENTATION

AM | @MackinlayEuruni

Sources. Evelyn Ehrlich & Duke Fanelli. The financial services marketing handbook. Tactics and techniques that produce results. Bloomberg, 2012, chapter 1 (pp. 19-29). Mike Mancini: "Segmentation and Customer Loyalty: Using Segmentation to Strenghten Customer Loyalty", The Nielsen Company, 2009.
-12):

. Segmentation is the most basic marketing strategy.

. Segmentation has always sought to answer four fundamental questions: [1] Who are my customers? [2] What are they like? [3] Where can I find more of them? [4] What channels and messages should I use to connect with them?

. More questions: Which organizations do business with your company? Can your clients be further divided into those that are in solid relationships and those that need to be cultivated? Can clients by analyzed by the types of products they currently buy and others that they may need?

. Targeting. Targeting is picking the actual market segments you want to go after. The benefits of targeting include the following: (1) It helps you identify the media that best reach your target segments; (2) It helps build referral business: the network effect!

. Life-cycle Segmentation. Consumers' needs change as they enter different phases of the life cycle. In the fund management business, that means shifting gradually from a heavy emphasis on risk and growth (equities), to a more balanced approach that adds fixed-income and dividend-paying stocks. Vanguard has launched the Vanguard Target Retirement Funds to allow investors to gradually become more conservative as the year of retirement approaches—reducing risk automatically.
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HEDGE FUNDS

AM | @MackinlayEuruni

. Hedge funds @UBS Wealth Management: "Hedge funds are subject to fewer regulatory restrictions than traditional investment funds; thus, they can entail risks that are difficult to capture using standard risk measurements" [see].

. Five common hedge fund strategies. [1] Long/Short Equity: This is the oldest and currently the largest category of hedge funds. Equity hedge funds look for undervalued (to buy) or overvalued equities (to sell) in certain regions or market segments, and seek to realize a profit when these investments revert to fair value. [2] Relative value. An arbitrage strategy detects price differences in the same types of instruments on different markets and attempts to exploit this spread. [3] Event-driven: Managers following this type of strategy seek to generate profits from upcoming corporate transactions such as mergers or takeovers. [4] Global macro. Managers of these hedge funds look for macro-economic trends, such as changes in interest or exchange rates, and for ways of benefiting from them. [5] Commodity trading advisors (CTA): This category of hedge fund deals mainly in futures (standardized, listed forward transactions) in financial instruments, currencies and commodities. Fund managers often use sophisticated computer programs to identify price patterns.

. Fees. Management Fee: Almost all hedge funds charge a management fee. The fee is typically between one and two percent of the asset under management per year. It is typically assessed many times a year to help cover the cost of running a hedge fund. For example, if a fund assesses a management fee 10 times a year, you will take out (asset value under management less liability)*(0.02)/(10) in management fee every time the fee is assessed. Some hedges, however, only charge clients as much as they use toward covering operational expenses. Performance Fee: This is also known as an incentive fee. Like the management fee, almost all hedge funds assess a performance fee as a component of their fee structure. Typically, this fee is 20 percent of returns. For example, if a one-billion dollar fund gained 30 percent a year and charges a 20 percent performance fee, then this fee amounts to ($1 billion)*(30%)*(20%)=$60 million dollars. As you can see, this is the most exciting fee in the hedge fund industry. Hedge funds with good records and high returns may charge substantially more [see].

. Dow Jones Credit Suisse Core Hedge Fund Indexes. Designed to represent the liquid, investable hedge fund universe, the Dow Jones Credit Suisse Core Hedge Fund Index is the first index to reflect the performance of managed accounts and other regulated fund structures sourced from across a range of platforms [see]. Interesting chart: bearish hedge funds performed much better during the 2008 bear market! (Note: there is a long disclaimer about risks at the end of this paper).

. Increasing regulations. Some hedge funds cease to operate with investors funds, and become family offices ("Hedge Funds Turning into Family Offices to Evade Dodd-Frank Regulations"). This is the case, I believe, of legendary hedge fund investor George Soros.

. Feature. Bridgewater Associates, run by Ray Dalio. Flight-to-safety! [QUESTION: HOW DID RAY DALIO PLAY THE FLIGHT-TO-SAFETY IN EUROPEAN SOVEREIGN BONDS DURING 2011?]

Resources. Hedge Fund Research; UBS-ETF HFRX Global Hedge Fund Index SF-A; Financial Times; Bloomberg.
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CORPORATE GOVERNANCE: PRODUCTS

AM | @MackinlayEuruni

Wonil Lee is an Allianz Capital fund manager based in South Korea. His has launched serveral investment funds that focus on corporate governance. Starting in 2006 with $25 million under management, one of his retail funds is now one of the top largest public funds in Korea with $1bn in assets. Mr. Lee has a narrow focus on Corporate Governance, which some consider a subset of Social Resonsably Investing. The fund takes stakes in companies that enable it to put pressure on management to increase dividends, sell idle assets and improve transparency and accountability (*). Says Wonil Lee: "I think Corporate Governance is the most important thing that will drive corporate competitiveness and growth".

It is a well known fact that Korean companies are valued at approximately 20% less than their Asian counterparts. In terms of corporate governance, South Korea was ranked 29th by Governance Metrics International among 39 countries in 2010. Consequently, poor corporate governance has been identified as one of the significant contributing factors to the discounted values of Korean companies aka the ‘Korean Discount’. From a cultural point of view, how does one go about implementing western styled corporate governance practices in a country where there is a lack of the fiduciary concept, a dislike of confrontation and relatively youthful capital markets?

Can western styled corporate governance practices be adapted to allow for cultural diversity and still achieve the same outcomes? Allianz Global investors in South Korea set up a governance fund in 2006 with a mandate from the state-run National Pension Fund. It now boasts one of the highest returns among equity funds in Korea, outperforming the country’s benchmark Kospi stock index by more than 10 percentage points a year. The fund invests in mostly small and medium-sized companies with a market capitalisation of below Won3tn ($2.59bn), where it can gain the clout to influence the management by taking a 5-15 per cent stake. It usually holds the stake for two to three years and tries to raise shareholder value by inducing lasting corporate governance changes.

Wonil Lee, head of Allianz Global Investors in South Korea, is a strong believer that better corporate governance can drive up business performance and investor returns. Instead of a confrontational approach, he engages with companies in a way that is more in tune with Korean culture and practices, which he believes is more effective.“I try to educate the owners and improve their practices through relational engagement,” he says. “Our capital markets and the institutional environment are not advanced enough to embrace aggressive engagement yet.The biggest problem of our listed companies is that owners think the companies belong to them. So they often make management decisions for themselves, not for the general shareholders. This clearly undercuts western philosophy which calls for the board to make decisions in favour of, and protect the rights and interests of all stakeholders. My job is to guard against such practice,” says Mr Lee.

Most Korean companies are still family controlled, with owners wielding undue influence over management, often with small equity stakes. About 90 per cent of Korea’s listed companies are owned by their founding families, compared with about 20 per cent in the US. Mr Lee learned the importance of relational engagement from western activist funds’ failed crack at Japan. The Children’s Investment Fund, stirred controversy in Japan in a shareholder campaign for change at the utility J-Power four years ago, but eventually had to sell its 9.9 per cent stake back to the company at a Y12.5bn ($158m) loss. Steel Partners also sold its 7.8 per cent stake in Sapporo Holdings 2010 after failing to implement changes at the struggling brewer.“Shareholder activism should be done by local managers who understand local culture. Otherwise, it is not easy to win,” he says.

However, such a soft approach does not often work in the face of resistance by entrenched management. In the worst cases, Mr Lee resorts to shareholder proposal and proxy voting to force change at companies. Most Korean institutional investors remain passive in exercising their voting rights, ignoring their fiduciary duty to protect the interests of their investors and casting dissenting votes only in exceptional cases. Mr Lee says he will not give up his fight because corporate Korea needs better governance to strengthen competitiveness.

(*) Roger Hitchcock: "Corporate Cultural Governance", Governance SA.
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CORPORATE GOVERNANCE: PRODUCTS

The Australia Governance Masters Index Fund [see]. Corporate governance is a set of policies that defines the relationship between stakeholders, management, and the board of directors of a company and influence how that company operates. The Australian Governance Masters Index Fund Limited invests only in the best governed top Australian companies within the S&P/ASX 100 Index, as ranked by the Company’s corporate governance analysis and third party research. The Company pursues an index style of investing with an active corporate governance bias and will hold securities of 75 to 85 Australian entities within the S&P/ASX 100 at any time.

Annual management fee: 0.49%. The Company believes that boards and management that show relatively high levels of corporate governance tend to outperform relatively poorly governed companies over the long term. See the performance of the fund. It's up 7.6% from the start of the year (vs. +4.1% for the benchmark S&P/ASX 200. Not bad!

[QUESTIONS: TYPE OF PRODUCT? / DESCRIBE TARGET SEGMENT ]
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A GLORIOUS DAY FOR INDEX-TRACKERS?

On Friday, August 3, the US Labor Department announced that job growth in July had increased by 163,000. The news was much better than expected; the stock market rallied, reflecting the hope that an improved economy will lead to strong corporate earnings growth. The S&P500 index went up by 1.90%, while the Nasdaq Composite closed +2.0% higher. Note that the ETFs that track them had an almost identical performance: the SPY (+1.98%) and the QQQ (+1.89%), which replicates the Nasdaq-100 index [see].

This was surely a glorious day for fund management companies who specialize in passive management. One can be certain that many active managers underperformed. Meanwhile, the Vanguard managers did not have to worry about the Fed and the ECB meetings, nor about the employment report. Some Financial Times articles provide a glimpse of the difficulties faced by some of the top active managers:

Hedge fund specialist Och Ziff Capital announced yesterday that all of its four main hedge funds still lagged behind the 7 per cent return of the MSCI World stock market index for the year at the end of june. The avergage hedge fund has gained less than 2 per cent by the end of june, according to Hedge Fund Research, and on Wedenesday one of the most successful managers, Louis Bacon, announced that Moore Capital would return $2bn to clients in the hope of improving returns on their remaining capital. Meanwhile, Fortress Investment Group was forced to close its commodities fund during the quarter after heavy losses.

(*) Dan McCrum: "Volatile markets take toll on alternative asset managers", Financial Times, August 3.
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PRIVATE BANKING: THE WORLD OF SPORTS

. Coutts (UK). The UK bank Coutts has a Sports & entertainment division, established in 1999. Dylan William: "We have bankers who are specialists in this field as it is important that they have a full understanding of the sector, the lifecycle of the individuals, and are able to work with a network of advisers to deliver for both UK and foreign players". Harry Keogh has been at the helm of this client group for the last 14 months, and currently heads up 13 bankers, specialising in this area. "The name Sports & Entertainment isn’t strictly representative," explains Harry, "especially since our clients are from a wide range of fields, including the music business, the arts, fashion, publishing, sports, film and television, and other media.

"Coutts private bankers are very aware of the fields in which all our clients work and particularly the nuances surrounding them. My dedicated private bankers build expertise and knowledge of the unique world in which our Sports & Entertainment clients move. For example, take footballers. These are young people who earn huge amounts of money in a very short space of time. Therefore, their banker needs to be aware of their requirements so that their earnings can be invested for the long term, as most football careers tend to end around the ages of 33 – 34 and sometimes a lot earlier than that," he adds. Private bankers pride themselves on being ‘in their clients’ worlds’.

They spend a large amount of their time getting to know their clients and understanding their needs, expectations and dreams for the future. The team also has long associations with many professional bodies like the Football Association and the British Association for Film and Television, so is constantly aware of the issues affecting its clients. And because the majority of Sports & Entertainment clients don’t work standard 9 – 5 hours, they expect a private banking service that works around their availability.

Harry continues, "These clients are incredibly busy people, so bankers will often go and see them on a television set or at a music studio where they are working. It’s the perfect place to understand exactly what their world looks like." Also, the client doesn’t just receive the services of their banker only, as Harry explains, "The banker is the conductor who brings everything together for the client to ensure they have all the information they need at their fingertips. This includes working with investment specialists, financial planners, philanthropic and tax experts and much more."
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. Elizabeth Olson: "Dream Team Helps Manage New Wealth : Credit Suisse Wins Gold With Plan for Athletes", New York Times, 27 July 2000.

According to Olivier Jaquet, Credit Suisse Private Banking, sharing a sports background was key to figuring out what package fit each athlete. "To have $600,000 at age 18 is very nice but very dangerous," he said. "Many of these athletes have only five to 10 years when they can make the money for the rest of their lives, and for some it will be difficult to start a second career." [NOTE: A VERY PECULIAR LIFE-CYCLE INDEED].
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. Sun Trust: cross-selling to athletes. Matt Ackermann: "Sun Trust expands wealth coaching to pro
athletes", On Wall Street, 8 January 2010.

Analysts said that other banking companies, including State Street Corp. in Boston and City National Corp. in Beverley Hills, Calif., have introduced business units to target athletes and musicians over the past five years because these clients present a lot of cross-selling opportunities. Carroll said SunTrust cross-sell lending, mortgage, banking and insurance services to its clients that are athletes and musicians. "This business has grown in terms of loans, deposits and assets under management even in a difficult market environment in the past two years,” he said. “Based upon the contracts that our clients have we expect strong growth to continue".
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PRIVATE BANKING

AM | @MackinlayEuruni

. Definitions & assets. Ultra high net worth individuals: more than €30 million; high net worth individuals: €1 to €30 million; affluent: between €100,000 and € 1 million; retail: less than €100,000. HNWIs are assigned a Relationship Manager or private banker who develops a personal relationship with the client. See one of the ads in the USB "You and Us" campaign from 2005-6:

. HNWI & Family Offices. Private banking or wealth management usually refers to tailored wealth management services to clients with investable assets of more than €1 million. Personal banking usually refers to the €100,000 to €1 million range (mostly invested in funds). Wealth Management teams usually offer investment vehicles covering the entire asset spectrum — including cash, fixed income and equities, as well as a range of alternative offerings such as private equity and hedge funds. Discretionary management: the bank's experts manage investment portfolios. Advisory mandate: clients receive advice, but take their own investment decisions [see].

. Family Office. A Family Office normally arises from a liquidity event: the sale of a family business, a significant inheritance or —as in the case of Lionel Messi—, a new and astronomic contract. A Family Office is a private entity of dedicated professionals exclusively devoted to the investment legacy and personal needs of wealthy families. Services provided by the private bank include financial, estate and tax planning; investment consulting, manager selection, asset allocation, tax compliance monitoring; charitable consulting and family counselling. In the US, a “family office” has to meet each of the following criteria: 1) Its only clients are “family clients” (family members and certain alter-ego entities formed for tax, charitable, or estate planning purposes); 2) It is wholly owned by family clients and controlled by family members; 3) It does not hold itself out to the public as an investment adviser.

. Where's the juice? Let us go through the Services for High Net Worth Individuals and Family Offices page at Credit Suisse, and let us try to identify teh following sources of revenue: a) transaction-based commission revenue; b) recurrent fee revenue; c) non-recurrent fee revenue (like sales charges); d) interest income. Private banks also offer a range of payment services: traditional check writing, debit and credit cards to on-line services such as bill pay, etc. Lending capabilities range from the conventional to the creative and include residential mortgages, unsecured loans and loans secured by marketable securities, commercial real estate and private jets, yachts, vineyards, ranches and art collections.
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PRIVATE BANKING: A LOOK AT CREDIT SUISSE

. Private Banking. Assets under management: CHF 1,2 trillion, of which CHF 791 from Wealth Management [see]. The bank's definition of Private Banking is very extensive: it comprises the global Wealth Management Clients business and the Swiss Corporate & Institutional Clients business (what we usually call corporate banking). In 1Q12, Credit Suisse's Wealth Management division reported income before taxes of CHF 551 million. Advice based on a structured advisory process, with a global reach via 22 booking centers and 360 offices.

Criteria. Commissions and fees from recurrent clients represent approximately 78% of net revenues. When client activity is moderate due to cautious investor behavior, clients tend to focus on simple, low-margin products (risk-free sovereign bonds, deposits). Gross margin measured in basis points.

Segmentation. Focus on ultra-high-net-worth individual clients, with more than CHF 30 million in investable assets. In 2011, the bank generated CHF 23 billion of net new assets from ultra-high-networth individual clients across all regions, representing a 61% share of total net new assets in Wealth Management Clients. This client segment contributed 36% of total assets under management in Wealth Management Clients at the end of 2011 (high-net-worth individuals at 48%). The bank has expanded coverage of ultra-high-net-worth individual clients across regions, serving them in close collaboration with Investment Banking and Asset Management.

Social Media. Credit Suisse at YouTube; @CreditSuisse; latest Advertisement Campaign; Sponsorship.
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PRICING: CONCLUSIONS FROM THE EXERCISE

AM | @MackinlayEuruni

Sources. Hooman Estelami. Marketing Financial Services. New York: Dog Ear Publishing, 2006 (chapter one, P. 12); Evelyn Ehrlich & Duke Fanelli. The financial services marketing handbook. Tactics and techniques that produce results. Bloomberg, 2012, introduction (pp. 13-14).
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. Pricing as a key marketing decision. Pricing is one of the most important decisions in marketing of financial services. Prices serve multiple roles for the financial services organization as well as for the individuals who use those services. To the financial services organization, price represents the sole source of revenues. In addition, price is the most visible component of the marketing strategy of a financial services organization. A second function of price is to communicate to the marketplace the identity and positioning of a financial organization.

. The Carmignac enigma. How does Carmignac Gestion manage to make so much money? It has been well established in consumer research that, under certain circumstances, consumers tend to rely on price a proxy for quality. They might therefore assume that higher-priced financial services are of better quality, and the lowering of prices may not necessarily be associated with more positive consumer impressions of the financial service. High prices may thus be quite acceptable to customers. Two factors might account for this fact: (1) Price complexity. Financial services prices are instrinsically complex and multidimensional. As a result, consumers may have a difficult time determining what exact price is that they are paying; (2) Returns trump fees. In some areas of financial services —notably, investments— consumers may focus on returns and ignore costs, event though costs will affect returns. In mutual funds, management fees for the same type of fund can vary by more than a percentage point, as personal finance experts have been telling the public for years. But very few investors pay attention to management fees, or even sales charges that can deduct 5 per cent from the investment before the money is ever put to work. Returns trump fees!

. Banco Santander: acquisition marketing. The minimum balance approach to pricing savings products (see Sun Trust) and the Santander approach have an instrinsic appeal among consumers. The term 'free' associated with this pricing approach is considered to be one of the stronger terms in advertising and consumer communications. The free checking approach is primarily used as a part of a broader customer acquisition strategy by banks with the underlying philosophy that it will facilitate new customer acqisitions and the eventual cross-selling of other financial services that banks offer to these new customers. (Remember the 'stickiness' o money decisions!) Acquisition marketing, anyone?
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EXCHANGE TRADED FUNDS

An ETF is a pooled investment which can be bought and sold on a stock exchange, like a share in a companyETFs are type of index-tracking fund managed to accurately mirror the performance of an index, such as the FTSE-100 of leading UK blue-chip shares [see]. This means that the aim of an ETF is to provide investors with the same return as the underlying market.

For example, if the FTSE-100 index goes up by 10% during a year, an ETF tracking this index should provide investors with the same return as the underlying market. ETFs are available that track most major indices for stocks, bonds, commodities, and other asset types, providing efficient access to many markets for investors.

Pricing. Average management fees: 0.40% (equity funds), 0.17% (fixed-income).

Some very popular ETFs:

. SPY

. QQQ

. IWM

. BOND [see]. This ETF tracks one of the most well-known actively managed bond funds.

. HYG

. GLD

. SLV

. PCY

. CAF

. EWP

See also @KeithMcCullough for some trading strategies using ETFs.
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ASSET MANAGEMENT

We cannot even begin to scratch the surface of the world of asset managers. Funds are managed across an almost infinite array of investment approaches, types of assets, geographical scope, risk levels, etc. The best thing to do is to plunge into the websites of some of the most well-known asset managers.

. JPMorgan Funds [see].

. Vanguard [see].

. Carmignac Gestion [see].

. Pricing I. 1) Management fee: annual fee charged by the asset manager to the fund; 2) Performance fee: fee charged when and if the fund exceeds its benchmark; 3) Operational expenses: commissions on trading, custody fees, etc.; 4) Exit fee: charged by some mutual funds when an investor sells shares within a specified, usually short, period of time; 5) Sales charge: a one-off fee paid by investors to the broker that sells the fund. JPMorgan allows sales charges ranging from 4.5%.

. Pricing II. Average management fee for equity funds: 0.82% (index-tracking), 1.77% (actively managed). Average management fee for fixed-income funds: 0.49% (index-tracking), 1.00% (actively managed). See also the very interesting Vanguard tool for comparing costs.

. Benchmarks. Some of the most widely used benchmarks are MSCI—Morgan Stanley Capital International is a leading global provider of domestic and international indexes; Russell—Offers an innovative methodology that has helped its indexes become widely used benchmarks; Standard & Poor's—One of the nation's foremost providers of indexes and financial data, Standard & Poor's (S&P) now has more than 200 indexes; FTSE—Financial Times Stock Exchange. Some funds have an absolute-return orientation, which means that it they aer not managed relative to an index.

 . Active management. Active investors believe that they are able to consistently identify enough high-performing investments to ultimately achieve better than average results. Active investors seek out what they consider to be better than average opportunities. Bottom-up or top-down selection approach. Most are long-only, though some funds allow for long and short positions [see].

. Passive management. Full replication of a benchmark index. Every stock in the portfolio is held at its exact weight. No market timing; no stock picking in search of mispriced securities [VIDEO: BOOK] [VIDEO]. Richard Ferri: The Power of Passive Investing: More Wealth with Less Work. New York: John Wiley & Sons, 2011.

. Growth. Growth funds seek companies that have strong earnings growth potential; process combines research, valuation and stock selection to identify companies that have a history of, or future potential for, above-average growth.

. Income. Income funds invest in income-producing securities, including debt and equity securities (didivend-paying companies). See Barron's Income Investing Blog.
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LOW-COST PROVIDER: VANGUARD

AM | @MackinlayEuruni

Sources. Evelyn Ehrlich & Duke Fanelli. The financial services marketing handbook. Tactics and techniques that produce results. Bloomberg, 2012, introduction (pp. 11
-12):

In some areas of financial services —notably, investments— consumers may focus on return and ignore costs, even though costs will affect return. In mutual funds, for example, management fees for the same type of fund can vary by more than a percentage point, as personal finance experts have been telling the public for years. But very few investors pay attention to management fees, or even sales loads that can deduct 5 percent or more from the investment before the money is ever put to work. Even on the institutionl side, returns trump fees.

John Bogle, former chairman of Vanguard Funds, has been a voice in the wilderness calling for a reduction in management fees for mutual funds. He has pointed out, quite sensibly, that the fee structures should have some connections to assets under management: a fund with few assets may need to charge higher fees to cover its costs and generate a profit. But even as assets double and triple in some funds, the percentages charged for management fees stay the same, thus doubling or tripling profits to the fund manager.

For the Vanguard Group, the failure of many consumers to pay attention to management fees has provided the money manager with a potent product differentiation as an extremely low-cost provider. There are seemingly enough consumers who are fee-conscious to have made Vanguard the No. 1 mutual fund investment company in the United States.
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The war to increase market share in the Spanish market

Spanish banks have launched aggressive marketing campaigns to acquire new clients and increase their deposit base.


Examples:


ING Direct
(With English subtitles in YouTube)


Bankinter

BOND UNDERWRITING

AM | @MackinlayEuruni

Suppose that German chipmaker Infineon (www.infineon.com) needs long-term financing to build a factory near München. Now, the ‘talent’ of the company is mostly made up of engineers and scientists. They may not be aware of all financing options available. And that’s how they approach an investment bank like … Deutsche Bank. Investment banks offer expertise and advice in creating a bond issue, including determining the interest rate and maturity [FEE INCOME!]. In acting as an intermediary between a bond issuer (who demands loanable resources) and a bond buyer (who supplies loanable resources), the investment banker serves as an underwriter for the bonds. What does that mean?

When investment bankers underwrite the bonds, they assume the risk of buying the newly issued bonds from the corporation or government unit; they then resell the bonds to the public or to dealers who sell them to the public. The investment bank earns a profit, based on the difference between its purchase price and the selling price (price concession).

Assets & Liabilties. Step 1. Infineon +€99m cash (assets), +€100m bond (liab.); DB -€99m cash (assets), +€100m bond (assets). Step 2. DB +€100m cash (assets), -€100 m bond (assets); Investors +€100m bonds (assets), -€100m cash (assets).

Maturity. Medium- to long-term.

Type of banking. Investment banking.

Info. See Bloomberg's 1 Half 2012 League.
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SYNDICATED LOANS

AM | @MackinlayEuruni

Syndicated loans are very large loan agreements entered into by several banks with just one client under the same conditions. A syndicated loan agreement simplifies the borrowing process as the borrower uses one agreement covering the whole group of banks and different types of facility rather than entering into a series of separate bilateral loans, each with different terms and conditions. Example: German software giant SAP wants to acquire Hewlett-Packard. [QUESTION: WOULD THAT REQUIRE A LARGE LOAN?] What can Credit Suisse do? Syndicated loans! "We help arrange syndicated loans at fair market rates and place them with third-party banks. After the transaction is executed, we also handle the administration (as agent bank) for you". We can underwrite syndicated loans for confidential transactions and place them at our own risk. Income for the bank: interest income on the loan plus arranger's upfront and annual fees.

Info. From the Credit Suisse website on Corporate Finance. See also: Guide to Syndicated Loans.

Balance sheet. Assets.

Type. Secured / unsecured.

Maturity. Medium- to long-term.

Type of banking. Corporate banking.

An Example from Citigroup. Citigroup is lending Koch Industries $11 billion to help finance its proposed $13.2 billion acquisition of Georgia-Pacific Corp., according to The Financial Times. The report said the financing is believed to be one of the largest loans on record by a single bank. Citigroup is not likely to put up all of the money once the deal is inked. Rather, it is likely that the financial giant will syndicate the loan to other banks. In the first nine months of this year [2005], global syndicated loan volume surged 28.3 percent, to $2.3 trillion, compared with $1.9 trillion in the prior year period, according to Thomson Financial. A major reason for the strong growth is merger activity, noted Thomson officials. The largest syndicated loan arranged this year was a $24 billion package extended to Procter & Gamble, reported Thomson, followed by a $20 billion syndication put together for GECC Capital Markets Group, and Volkswagen AG's $15.3 billion loan, said Thomson.
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Retail Products

Credit cards, Debit cards, savings accounts, internet accounts, etc

ING Retail Products

ADVERTISING IS NOT MARKETING

AM | @MackinlayEuruni

Sources. Evelyn Ehrlich & Duke Fanelli. The financial services marketing handbook. Tactics and techniques that produce results. Bloomberg, 2012, introduction.
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We'll talk a lot about advertisement during the course — sometimes for practical reasons (i.e., the heavy schedule). But as Evelyn Ehrlich and Duke Fanelli rightly point out, advertising is not marketing. Here's the relevant fragment (p. 3):

We've run into a lot of people, often in sales, who think that the most essential thing you need in order to improve sales is advertising. Or, conversely, we've run into other people, also often in sales, who don't believe in marketing because advertising doesn't work. So let's get this straight right away; advertising is one one tool in marketing, and it's not always the central one. Anyone who wants to incrase business is going to look for the fastest and easiest way to do it, which usually means committing a lot of money.

But marketing is a discipline that requires strategic thinking more than it requires a big budget. Careful planning means setting goals, choosing target market segments, determining or creating a product's differentiation and positioning, and selecting the tactics that will get the product noticed and bought by your targets. Successful marketing can mean playing golf with your best client's CEO, or it can mean opening new markets in Asia.

The talking baby ads have been a big hit for E*TRADE since they debuted during the Superbowl broadcast in 2008. One of many online trading firms that cropped uo during the first dot.com fever in the late 1990s, E*TRADE is among the few of its contemporaries still on the scene. One of the reasons for its longevity has been a willingness to break through the clutter by creating amusing advertising that has generated viral success — and added to the bottom line.

But note that the ads, while certainly attention-getting, also work on the level of matching the brand's image with the firms's positioning strategy. The point of the campaign is that E*TRADE makes investing so easy that even a baby can do it. Other online brokerages could make the same claim — but the baby gets the message across with humour and charm — qualities not usually found in
financial advertising.

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SUBJECTIVE PERCEPTION OF QUALITY

AM | @MackinlayEuruni

Sources. Hooman Estelami. Marketing Financial Services. New York: Dog Ear Publishing, 2006 (introduction).
_____________

. Estelami: "A unique aspect of financial services marketing which differentiates it from other marketing practices is the illusive notion of quality. In the context of financial services, the notion quality is a highly subjective phenomenon.

- Insurance products: low probability of occurrence. "While the objective quality of an insurance company might be reflected by the willingness of the company to pay out customer claims, this measure is rarely known by the average user. In the insurance business, the majority of policyholder do not utilize their policy benefits since the events being insured typically have low probabilities of occurrence. Quality assessments in such a context are therefore not objective and are largely based on subjetive factors such as the customer's recognition of the name of the company or suggestions by friends" (p. 11)

- Asset management: time needed to assess quality. The objective quality of a broker-recommended investment portfolio may not be evident for many years until the securities in that portfolio have exhibited their long-term characteristics" (pp. 11-12).

[QUESTION: DO YOU UNDERSTAND THESE STATEMENTS?]

[CASE: BANCO SANTANDER INSURES MI HOME!]
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PRICE COMPLEXITY (II)

Asset management: some funds have an annual management fee, a custody fee, administration and dealing costs, performance fees, and costs associated in investing in any other funds.

Talk about price complexity!
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PRICE COMPLEXITY

AM | @MackinlayEuruni

Sources. Hooman Estelami. Marketing Financial Services. New York: Dog Ear Publishing, 2006 (introduction, p. 12; chapter 4, p. 109).
_____________

. Estelami: "The prices of financial services are intrinsically complex. For example, the lease price of an automobile might consist of monthly payments, the number of payments and a down payment, rather than the single sticker price used when purchasing the vehicle with cash. Often the price consists of multiple numbers, some of which the consumer may not even completely understand. this not only makes the task of understanding the various prices available in the marketplace difficult for the consumer, but it also creates scenarios that may lead to deceptive and, in some cases, unethical practices from marketers (p. 12).

Revolving credit has no specific time limit, but should be used by consumers as a short-term instrument for borrowing. An example of revolving credit is credit card debt. Since revolving credit is of a short-term nature, associated rates of interest are often linked to short-term interest rates. On the other hand, non-revolving credit is often associated with longer-term interest rates, such as US Treasury rates" (p. 109). What a statement! And a wonderful opportunity to briefly introduce the notion of the yield curve.

* * *

The yield curve: a very brief mention. Frank J. Fabozzi. Fixed Income Mathematics. Analytical & Statistical Techniques. Chicago: Probus, 1993, chapter 13.

The graphical depiction of the relationship between the yield on securities of the same credit risk and different maturity is called the yield curve. The yield curve is constructed with the maturity and observed yield of Treasury securities because Treasuries reflect the pure effect of maturity alone on yield, given that market participants do not perceive government securities to have any credit risk. When market participants refer to the “yield curve”, they usually mean the Treasury yield curve. This is also true in the bond markets of other countries.

The exhibit shows four yield curves that have been observed in the US Treasury market (and occur in other major government bond markets). In the yield curve in panel B, the yield increases with maturity. This shape is commonly referred to as an upward sloping or normal yield curve. The yield curve on panel C is downward sloping or an inverted yield curve. In a humped yield curve, depicted in panel D of the exhibit, the yield curve initially is upward sloping, but after a certain maturity it becomes downward sloping. Finally, a flat yield curve is one where the yield is the same regardless of the maturity. A flat yield curve is shown in panel A.

. US Department of the Treasury: Daily Treasury Yield Curve Rates; Bloomberg Yield Curves
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THE IMPACT OF REGULATIONS (II)

Let's do an exercise with ads taken (mostly) from the Financial Times. We will come back to these ads many times during the course, always in different contexts: types of banking, products, pricing, segmentation, branding, etc. Today we want to look at some details from the point of view of regulation.

* * *

[QUESTIONS: DO SOME OF THE NAMES SOUND FAMILIAR TO YOU? DO YO UNDERSTAND THE PRODUCTS INVOLVED? FIND EXAMPLES OF RECENT FINANCIAL ASSET PRICES WHOSE PRICES HAVE CHANGED DRAMATICALLY IN RECENT DAYS/WEEKS. FIND TRACES OF COMPLIANCE WITH REGULATIONS; ANY COMPARISONS, SAY, WITH ... CIGARETTES?]

_________________

THE IMPACT OF REGULATIONS (I)

AM | @MackinlayEuruni

Sources. Hooman Estelami. Marketing Financial Services. New York: Dog Ear Publishing, 2006 (chapter one, P. 12); Evelyn Ehrlich & Duke Fanelli. The financial services marketing handbook. Tactics and techniques that produce results. Bloomberg, 2012, introduction (pp. 13-14).
_____________

. Estelami: "The practice of marketing financial services is distinctly different form other marketing practices due to the dozens of regulations that rule the industry. For example [in the US], the type of content included un in a financial service advertisement is controlled and closely monitored by regulatory bodies, such as the Securities and Exchanges Commission, the Federal Trade Commission, and the departments of insurance in individual states".

. Ehrlich & Fanelli: "As if financial marketers didn't have enough dealing with the structural issues of the industry, they must also answer to a higher authority. Financial services are among the most regulated of industries, at the federal, state, and industry-watchdog level. These regultaroy constraints affect numerous marketing decisions. For example [in the US] the Financial Industry Regulatory Authority  (FINRA) must review all marketing materials created by investment companies.

A a practical level (in the case of an advertisement campaign), marketers need to plan ahead. You have to arrange for compliance and legal review of all material, and adequate time for these reviews must be factored into production schedules and launch dates. You must design disclosure language into your layout as well as allow for it in your broadcast advertising. Failure to do so will not only cost you time but also potentially thousands of dollars in new creative and production costs.

[CASE STUDY: FINRA & ADVERTISING]

Wandering through the FINRA website, I took a look at the section on Disciplinary and Other FINRA Actions for the month of June, 2012. Consider the following case:

FISN, Inc. dba First Internet Securities Network (CRD #18498, Bethesda, Maryland), submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $20,000, and required to, no later than 30 days after the acceptance of the AWC, discontinue any use of the phrase “Federally Insured Savings Network.” To the extent that the firm makes any advertising or sales literature available to the public or any customer more than 30 calendar days after the AWC has been accepted, the firm must first submit such material to FINRA for review. Any advertising or sales literature not submitted for review must be removed from the website or otherwise made unavailable to the public or any customer until after it has been submitted to FINRA for review.

The firm shall take all reasonable steps to withhold, or cause to be withheld, such material from further publication until changes specified by FINRA have been made, and such material will be revised and re-filed prior to any use, unless otherwise agreed to by FINRA. These requirements shall remain in effect for one year following the acceptance of the AWC. Unless the firm files a Uniform Request for Broker-Dealer Withdrawal (Form BDW) within 30 days after the acceptance of the AWC, the firm must file an amendment to its Uniform  Application for Broker-Dealer Registration (Form BD) to delete all references to the phrase "Federally Insured Savings Network” and certify by a letter signed by its president that it has complied with these undertakings no later than 30 days following acceptance of this AWC.

Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that its website included statements suggesting that the firm and the products it sold were federally insured, when in fact, they were not. The findings stated that the firm listed numerous types of fixed-income securities labeled CD Alternatives, suggesting that these investments had features and risks comparable to the features and risks of certificates of deposit (CDs) when they did not. The findings also stated that the firm’s website included statements regarding CDs the firm sold that were unwarranted and lacked a sound basis in fact. The firm’s website suggested that the rates the firm found and published were the safest and highest rates and best yields available when they may not have been. The findings also stated that the firm made available, both in hard copy and through its website, a brochure that contained several statements that were unwarranted and lacked a sound basis in fact regarding its products and services.
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