David Macchia: Philipp, I know my readers will be very much interested in knowing about you on a personal level, and perhaps about things that typically do not come through in official communications. For instance, what brought Philipp Hensler to the high position he has today? From where did you come?Philipp Hensler: I think you know that I was born and raised in Zurich, Switzerland. I did all my undergraduate studies in Zurich, and obtained my graduate degree from the Fuqua School of Business at Duke University N.C. – which, I guess makes me a Blue Devil. I also am a Certified European Financial Analyst.
So much for my educational background. In terms of professional experience; before coming over to the United States, I started off my career as a junior advisor for UBS, and then quickly moved into asset management. My first position in asset management was with the traditional British private bank, Coutts & Co.
They hired me as a financial analyst to cover Continental European stocks which I did for three years. They must have liked my stock picks because they then made me the lead fund manager for their two largest equity funds; a Continental European Equity Fund and a Global Equity Fund. I was also responsible for managing their in-house pension fund which was a balanced mandate, if you will.
I did that for a couple of years, and then subsequently, I joined Scudder Investments in Switzerland. That was in 1998, a year after Zurich Insurance had bought Scudder. The mandate was to build a retail distribution network in Switzerland from scratch. When Deutsche Bank bought Scudder in 2003, I moved over to the Deutsche Bank side as the head of retail distribution for DWS Investments in Switzerland. Very shortly thereafter they promoted me to become the CEO and Country Head of all of Deutsche Bank’s asset management business in Switzerland, which is what I did for two years. In 2005, I was asked to come over here to the United States and be the CEO and Chairman of DWS Scudder Distributors Inc.
I was very fortunate to have had a working experience in all the areas that matter in the retail asset management space today: the advisory, the manufacturing and distribution of financial products. My motivation is my passion for the business and the people that I work with; as well as the constant quest to look beyond the obvious in trying to find new solutions, new ways of creating value for advisors and ultimately the shareholders of our funds.
Do you feel the U.S. experience engendered some special insights and abilities that you might not otherwise have gained?Good point, David. I think having had the opportunity of obtaining an education in two continents allowed me to gain a truly global perspective. The insights that I earned through Fuqua’s extensive Global Executive MBA program certainly prepared me for my expanded roles. Working on assignments with senior executives from around the world provided a learning environment that was unique and very rewarding. I had teammates from Singapore, Argentina, and the U.S. simultaneously working on assignments with me, while we were geographically separated.
We truly created global teams; when we had an assignment, the person in Singapore would start it off, hand it over to me in Zurich, I would send it to our team mate in Buenos Aires and he forwarded it on to the guy in Portland, Oregon. We were working on projects 24/7 which created a totally new understanding and appreciation of the power of global networks for me. I realized that by creating global networks we can leverage the expertise of individuals in remote locations and easily apply it to issues in our home market. Although managing global networks can be complex, it can most certainly provide solutions that wouldn’t be readily available to us if we constrain ourselves to the resources in the local market place.
Given that experience, I had a desire to move out of Switzerland and experience yet another culture, expand my horizon even further. The experience I’ve had here in the U.S. over the last three years has been tremendously valuable. It made me a better manager, made me understand what one has to do to thrive in a globalized world and apply that knowledge to the U.S. market.
It strikes me that the work experiences that you accumulated on two continents, in terms of your work in distribution, that perhaps that has given you a special understanding of the needs and challenges facing financial advisors and distributors. Does that strike you as being accurate?Yes, David, I’d like to think that having had executive positions in two continents helps me, but also having had the possibility to work as an advisor, an analyst, a fund manager, a sales person and now as an executive made me understand how the individual components of the service value chain of our business should work together.
We at DWS Scudder have a thorough understanding of those interdependencies which has allowed us to become very efficient in delivery of world class solutions to our clients. I personally understand what it is that advisors are faced with on a daily basis. I’ve lived it. I know what it feels like to be a fund manager, the ups and downs that you go through, and that has given me great insights into the manufacturing side of the house. Later in my career, I realized that I wanted to lead and manage people. I love the interaction with people and so while I enjoyed being a fund manager, I haven’t regretted moving to the distribution side of the business at all as it allows me to be in touch with our most important assets all the time, i.e. our clients and employees.
Given the experiences you’ve had in both Europe and the U.S., I want to ask you about the differences between European financial advisors and American financial advisors. Is there anything that immediately comes to mind in terms of how the two may be differ? Yes, I think they are coming together more and more as, again, we are living in a globalized world where there’s a certain homogenization. If I had to point to one distinctive difference between advisors in the U.S. and advisors in Europe, however, I think it would be the way investment decisions are being made. In Europe you have a very strong top down approach. The home office pretty much tells you what you can and cannot do. It’s kind of a guided architecture model if you will. Whereas the way I see it in the U.S., advisors are still the center of the decision-making process. More of a bottom up culture.
And while there is more and more influence from the home office in the U.S., there is still a high degree of independence, and a high degree of decision making power which resides with the advisor him or herself. However, I do see that the two models are more and more converging. This did strike me as a big difference when I came here to the U.S.
Differences also manifest themselves in the way mutual fund firms distribute their products. In Europe you would typically market to the home office and to the gate keepers, whereas here in the U.S., you primarily market to the individual advisor complemented by a very comprehensive research driven approach to the home offices. We understand that while we need to service and support the advisor, recommended lists and models are becoming increasingly important. Winning business there takes an institutional mind set and a new breed of key account managers. We have spent significant resources to train our people and get them professional designations that will allow them to differentiate themselves from their competitors and be a valued partner to the research folks of our most important clients.
I know that one of the areas that you’re deeply involved with is in the entire issue of U.S. retirement security, especially in terms of the boomer generation now beginning to enter the distribution phase.
Is there potential for very significant changes in the retirement-security landscape, even to the extent that large organizations can become marginalized, assuming that they can’t retool to be more relevant in the distribution phase, and also that new players could emerge that become large players, conditional upon their ability to come to market with the right kind of products, transparency, better business models? I fully agree with that, David. There is no doubt that this is one of the major trends in the industry. I think the game is changing and I believe that what pre-retirees and retirees are demanding are solutions that aren’t necessarily readily available today. I think in your questions you mentioned confidence, which I think is going to be a very important part. As an individual investor and advisor alike, you want to do business with people that you know will be around for the foreseeable future. You want to do business with an asset management firm that you know has enough substance to be around when you retire and beyond. Having the opportunity to work for Deutsche Bank’s Asset Management division, one of the largest financial services organizations in the world, with over $815 billion in assets under management globally as of December 31, 2007, provides that critical mass and level of confidence that you referred to before.
But in terms of product, David, I would re-phrase confidence or rename confidence to predictability. I think that it is probably one of the biggest catalysts for change in our industry today. It will define our approach to the challenges that we all face when it comes to retirement. The asset management industry as a whole needs to provide solutions that have a very high degree of predictability in terms of their investment outcomes. In other words investors will always prefer a portfolio which gives them the least deviation from the desired outcome, and that’s where I believe, outcome-driven products like structured notes come in.
They can provide a very specific outcome at a desired future point in time, with the lowest deviation possible. I also believe that the mutual fund industry has to create products which offer that kind of predictability.
Exactly how important are structured products to the DWS Scudder’s future?Very important. The DNA of DWS Scudder is global and innovation. I think we can support our global claim by the fact that we have more than 700 investment professionals around the world providing investment insights and recommendations for our customers. However, we need to prove to the market place that we are indeed one of the most innovative asset managers in the industry. Besides the recent innovative mutual fund launches like the DWS Life Compass funds, DWS Alternative Asset Allocation fund and the DWS Climate Change fund, we are putting a lot of emphasis on structured notes as they are an ideal tool for the next generation of investment management.
In Europe, structured products are enormously successful. Is it likely that the European experience will be duplicated in the United States? If so, how quickly will that occur?I am pretty confident that the U.S. market will quickly catch up to Europe and eventually will surpass it. Structured notes in Europe are widely accepted, even by the most conservative investors. I wish I knew how quickly this will happen. We have already seen tremendous sales growth in the monthly volumes since we started in 2006, and we are committed to improving our service model and extending our customer base rapidly. It is encouraging to see that we not only have more and more new advisors embracing structured notes, but we also see a lot of advisors coming back for more. This shows me that structured notes really offer value to advisors and their clients.
If you were right now speaking to a financial advisor who has yet to make the conversion into retirement income planning, what would you say to him or her?Don’t waste any more time. There is enough empirical evidence that there is significant money in motion looking for innovative solutions. Advisors, who embrace the new paradigm will emerge first as the leaders and gain market share. The same holds true for asset managers.
Would you talk a bit specifically about DWS Scudder’s newest products?As you know, we have just launched two new mutual funds, branded Life Compass Protect and the Life Compass Income. They provide the predictability that we talked about before in the sense that your principal is protected by a third party warranty in the case of Life Compass Protect, or the security of regular fixed distributions in the case of Life Compass Income.
These outcome driven solutions will play a more dominant role in the retirement asset management world going forward. DWS Scudder believes that investors require a new approach in the way they look at their portfolios, as they will realize that creating portfolios with traditional asset classes only, even though they may create the most efficient portfolios possible, may not result in the returns required for a comfortable retirement. The reason is that the increased correlation between those traditional asset classes has diminished the diversification benefits. Therefore, we are advocating for what we call the efficient frontier liberation. We need to liberate the efficient frontier from the traditional asset class constraint and add alternatives or outcome-driven products to the mix that have lower correlations and, as such, better diversification benefits.
If you look at what the most sophisticated investors are doing today, and I would include, the endowment funds into that category, you start to realize that they have a significant portion of their portfolio in real or alternative assets. Which in many cases, not only is double but even triple to what the retail investor typically has. Furthermore, these institutions are also allocating a significant portion of their wealth outside the US. Investors in this country need to continue to embrace this global world and take advantage of investment opportunities that reside outside the United States.
What you’re describing, if I understand it correctly, is perhaps a democratization of these sophisticated techniques. Do you see it that way?Yes, I do. I think it is the job of the asset management industry at large to help with that process. And I love the word “democratization.” I think that is exactly what it is, David. Giving or allowing the retail investors — the investment public at large — to access investment strategies that were largely reserved for the high net worth market or the institutional landscape. Providing investors access to that asset pool is of paramount importance to us at DWS Scudder.
Do you think that the industry is going to deliver the requisite education in the right way so that the new strategies, the liberation of the efficient frontier, the new structured products can find their place in the marketplace to the extent that they should?I think the asset management industry will adapt and will rise to the challenge. It always has in the past. However, I agree with you, David, that this is an enormous task. There is a new reality out there that we, as asset managers, have an obligation to take an educational lead and I’m glad to say that DWS Scudder has taken a decisive step in that direction and has dedicated significant resources to educating advisors.
When we started offering structured notes to the market in 2006 we realized that the first thing we had to do was to create educational material, not just printed brochures, but also make sure we had a very strong website for investors to visit so that they may fully understand what structured notes are all about. Without that upfront investment in our education infrastructure we would not have been able to have the success we have seen over the last 12 to 18 months.
Once we had that in place, we embarked on a very diligent and in-depth training program for wholesalers. It is important to have the hard factors, such as great marketing material, and a value added website in place. However, the soft factors, i.e. the skill level of our sales people, determine the success of our endeavors. The days of wholesalers having a singular product focus are long gone. Today and even more so in the future, top industry wholesalers become consultants that not only sell their flagship mutual fund but are also able to assist advisors in many different aspects of their business, such as retirement planning, portfolio construction and practice management. We call it the holistic distribution model.
David, there is more that needs to be done. I know you are in the forefront of developing tools and you already have tools that help advisors, and the investment public at large, understand what it is that one needs to do in the retirement market. I think this certainly is one of the biggest challenges and one of the most exciting challenges for people embracing this new era.
The results of the Wealth2k Advisor Survey tell us that advisors are just about fed up with product meetings, and that they’re looking for value; they’re looking for strategy, they’re looking for education. It strikes me that you’re ahead of the curve in this area. Do you sense that?I love to think that way and feel that our outcome-driven approach, i.e. making sure that we improve the predictability of future investment returns is truly unique. We have thoroughly embraced this new paradigm internally and have now started to introduce it externally and educate the marketplace. It is very encouraging to see how well advisors are responding to what we are proposing.
It feels great to see that we are slowly but surely changing the perception of DWS Scudder – the biggest challenge I had to face when I came here. It wasn’t that reality was bad at Scudder at the time. Rather, it was the perception the marketplace had of us that was not satisfactory. Now we are showing people that this is a new company with new ideas, that we are a leader in this outcome-driven market, and in the way we approach advisors.
I often feel that advisors really need context for the use and selection of products. Is it your sense that this context is as important as I think it is?
I think context is very important. According to a recent McKinsey study investors are most interested in purchasing financial products that would protect them against the following risks: 1) market performance risk, 2) health care risk, 3) inflation risk, 4) longevity risk, 5) interest-rate risk. These are specific outcome driven events, which investors are seeking protection for. In addition to that, these are different needs than what investors had in the past. I would argue that this will have a fundamental impact on how we construct portfolios going forward, as more and more outcome-driven building blocks will be incorporated into traditional asset allocation models. New models will be customized to specific life events, which may change as the investors’ context changes. Assuming the above, I could very well imagine that conversations that advisors have with clients may change from “what is your level of required income” to “what do you need the income for?”
I do believe that, again, we, as the asset management or mutual fund providers, need to make sure we can create products that cater well to those specific life events that retirees face. We need to create products that basically immunize people against these life event risks, and make sure the asset portfolio matches the risk and duration of the liabilities. In most cases, we know really well what the liabilities are that people have, and it is then our job to create products on the asset side that specifically match those liabilities and help investors immunize themselves against the risks that those liabilities represent.
At DWS Scudder, we understand that this approach isn’t yet broadly accepted and that it will take time to develop an understanding in the market place. However, this is a part of the challenges that you face when you are a leader and are committed to pave the way. We are confident that retail investors will embrace this new philosophy faster than anticipated, as they will follow the lead of what proves to be a very successful strategy in the institutional market place, which usually is a great lead indicator for trends in the retail space.
If you were not the chairman & CEO DWS Scudder, but instead could have any occupation, including potentially in any other industry, what would you choose to do?I guess I would choose an academic career. I enjoy research and lecturing as well as developing new ideas. So, having the opportunity to work at a university where I have the resources to do that would be quite appealing to me. My field of expertise would probably be behavioral finance. I’m intrigued by the findings that led to Daniel Kahneman and Amos Tversky winning the Nobel Prize. Their work centered around the apparently strange way in which people make decisions in risky situations, which has broad applications to the industry that we are in.
If I could somehow convey to you a magic wand, and by waving this magic wand you could effect any two changes, instantly effect these changes, in the world of financial services, what would those changes be?I guess I’m stealing one of your quotes: “democratization” of the investment management world, i.e. giving the broader public access to vehicles that has historically been reserved for the high net worth or institutional market place. I believe everybody should have access to the best possible investment solutions.
The second change would be that investors would reduce their focus on chasing the top performer of the past and instead spend enough time to evaluate their investment options, and create portfolios that secure themselves against risks associated with their specific, future life events.
If you try to imagine your own retirement in its most perfect, idealized form – where would you be and what would you be doing?I’d probably be between Paris and somewhere on the central coast of California. I’d probably have a beach house, go for walks with my wife and probably two or three dogs. I’d like to stay active, so I’d like to do sports if I’m still able to. I’d also like to lecture at the university and pass on the things that I’ve learned to the next generation. Again, bringing me back to my academic ambitions, helping the next generation to understand some of the things that took me quite a while to figure out would be important to me. If I can be of assistance, if I can give back and guide others – I’d love to do that. Oh, and the leisure to enjoy life’s simple, but most important pleasures: good friends, good food, good wine and nature. That’s pretty much it.
What sports do you play?Well, I’m not quite sure whether I play golf, but I suffer golf and, in general, I love things that I’m not good at. The moment I master something, I get bored. And golf to me is the ultimate challenge. I don’t think I’ll ever be a good golfer, but I love the challenge, I love to be out there in nature, and I guess I kind of enjoy the humbling humiliation that comes with golf. But it’s a great equalizer, you know, on the golf course everybody’s the same. When I’m focusing on this white ball I kind of blend out everything else.
David Macchia runs Wealth2K, www.wealth2k.com, a financial-services media and marketing company focused on retirement income.