Calastone held its Connect Forum in London on May 16. Specialists from across the funds industry spent the morning talking about distribution and some of the changes it is likely to go through.
Distinguishing and understanding the disruptors
One of the key themes that we saw throughout the Connect Forum was disruption. George Mitton, international editor at Funds Europe, began proceedings by referencing a case study of disruption in the form of the exertions faced by the record industry in the 2000s as a result of music streaming and sharing sites such as Napster. This devastation on the music industry saw revenues decline by 40% between 2000 and 2015 as physical sales slumped as a result of this new (and popular) technology. It is not a case of “if” fund management is going to be disrupted, but when.
Explaining “why” the fund management industry is at risk from disruption is simple. A number of attendees I listened to at the Connect Forum recognise that asset managers have posted pedestrian returns, but fees have not dwindled. Equally, they are conscious that the industry is reliant on a 20th century distribution model, which has not kept up with new buying trends seen in other industries. Purchasing fund units is a process that remains manual for the initial investor; costly; and interspersed with intermediaries. It is almost inevitable disruption will come.
The likely challengers
The audience recognised that the way funds are distributed needs an overhaul otherwise it will find itself out of step with changing consumer behaviour. A Funds Europe study commissioned by Calastone, which was officially launched in June 2017, found that 57% of respondents believed that online, direct-to-consumer (D2C) distribution channels would take over from the traditional channels (banks, independent financial advisers [IFAs]) as the main routes for asset managers to raise money.
The audience at the Connect Forum was reminded how asset management experts used to dismiss the possibility of a Google or Amazon moving into their market. The funds’ industry cited regulatory challenges as a deterrent to any technology company looking to develop a competitive offering.
“The funds industry repeatedly said that these Internet giants lacked a financial brand name or necessary comprehensive entry strategy, and did not want to be overly regulated. One only needs to look at the success of the Yu’e Bao savings account come money market fund in China to dispel that notion,” said Edward Glyn, global head of relationship management at Calastone, speaking at the Connect Forum.
Yu’e Bao was launched by Alipay in 2013 with a minimum subscription of 1RMB. This online product is now looking after more than $165 billion in assets belonging to over 260 million customers making it the world’s largest money market fund. The majority of its clients are rural and low income, and aged between 20 and 30 years old.
This low earning millennial market is exactly who asset managers in Europe and the rest of world should be trying to influence over the next few years. “If asset managers want to excel in capturing this tech-savvy generation, they are going to have to adapt their traditional distribution model and boost their emotional engagement and digital connectivity with end clients, while reducing the costs of investing. In short, they need to become relevant, trusted and attractive in order to emulate what Alipay has done,” said Glyn.
Robo-advisors: fund distribution of tomorrow
“One of the consequences of the Retail Distribution Review (RDR) is both advisors and asset managers are increasingly focusing on the already wealthy baby-boom generation. However, they desperately need to appeal to people in their 20s, 30s and 40s, if only to ‘pump-prime’ the next generation of wealth clients,” said David Moffat, group executive of International Financial Data Services.
However, Robo-advice has been helped by regulations such as the RDR in the UK and the Markets in Financial Instruments Directive II (MiFID II). Middle income savers have found themselves priced out of investments as they do not want to pay for advice, as they are now obliged to under RDR and MiFID II.
The industry is, however, divided about robo-advice. The Funds Europe and Calastone study found that 42% of respondents agreed robo-advice would become the dominant distribution channel for raising assets from the mass retail market, while 28% disagreed. Phillip Bungey, COO at Seven Investment Management, acknowledged it was unlikely robo-advisors would provide full-blown advice, but rather small scale supervised guidance to clients looking to put money into ISAs, for example.
Only 19% of attendees at the Calastone Connect Forum said they would trust the technology fully including with their tax advice. Another challenge with D2C models such as robo-advisors – especially those owned by asset managers themselves – will be that the former may lack the brand strength to reach out to the masses.
Jervis Smith, head of investor services at Citi in Luxembourg, said D2C would only be effective if fund managers had excellent branding. Such high-profile marketing and advertising comes at cost, and it is only really viable for the biggest fund managers.
Extracting the most from big data
Creating new distribution and technology systems from scratch is not the only solution fund managers have at their disposal. “Data is increasingly important. A number of industries are embracing data, and it is helping them to personalise what they provide to the end consumer. Take a look at the insurance industry, for example. Some forward thinking health insurers are leveraging the data from Fitbits to assess the type of policies they should offer certain clients,” said one speaker.
Knowing who the clients are; their motivators; and long-term interests is critical for any business to survive. The organisations that harness data to the fullest include technology giants such as Facebook, Amazon, or Google, and between them, they know what people are sharing; what they are buying; and what they are searching for in the most granular of detail.
The funds industry pales in comparison. An audience poll at the Calastone Connect Forum found just under 6.5% of attendees possessed “great data and knew how to use it.” The majority (81%) acknowledged they had some data, but did not really use it, while around 11% said “big data scared them.” The Funds Europe/Calastone study found 51% of respondents felt asset managers were not good at using the data in their possession.
The reasons for this are multi-fold. The Funds Europe/Calastone paper found 52% of respondents felt managers did not have access to the necessary data, while 43% blamed a lack of internal expertise. Forty-one percent felt the industry did not have the appropriate technological infrastructure to interpret or make use of the data.
But big data – if used astutely – can be a powerful way of the industry both better understanding what its customers want and how they are likely to consume.
This presents a huge opportunity for organisations to aggregate information on end asset owners, and feed it back to the manufacturers. This will allow product manufacturers to tailor their fund offerings based on an aggregate profile of end investors and what they are buying.
Making distribution work long-term
Fund buyers’ habits are changing and the audience recognised the industry needs to wake up to this. The Calastone Connect Forum brought together a number of stakeholders in the funds world including asset managers, distributors, platforms and Transfer agents (TAs), and I believe there is a general consensus that something must be done to modernise the funds industry and its approach to distribution if it is to remain relevant. The big question is whether the industry will change itself or be disrupted?