Distribution and the processes behind it have changed markedly over the last few years. This has been triggered by a number of factors including regulation, innovations in technology and evolving investor buying patterns and demographics. An inability or reluctance to respond appropriately to these market transformations will undermine the ability of managers and distributors to sell their products.
Adaptation to New Technology
Having attended Fund Forum International in Berlin recently, I noticed that once again “Blockchain” was a dominant theme throughout the conference, alongside many other discussions about other innovative technologies used in our industry. Market participants point out changes in technology over the last five years have occurred at an unparalleled speed. Automation is key, as is ease of use and speed of sale to the end customer. Robo-advisors, as was to be expected, also took up much of the Fund Forum International proceedings. While computational investment advice can hardly be described as a new innovation, fund managers do need to be mindful of its potential and rapid evolution. This technology can ease the distribution process by offering investors a menu of managers for their portfolios which are in tune with their return and risk profiles.
This technology would also broaden managers’ target audience, particularly if robo-advice could be offered on smartphones or tablets. Millennials are loath to have physical interactions with wealth advisors, but would prefer to invest online judging by their existing behavioural trends. Any robo-advice must be straightforward to understand and use, and be accessible 24/7. If managers achieve this, they will have more luck raising money from younger people looking to invest, a noticeably underserved investor segment. Distribution in markets such as China are increasingly dominated by online platforms. If firms want to realise capital raising success in tech-savvy jurisdictions such as mainland China, they should look towards online distributors as a mechanism to achieve just that. However, it is crucial to emphasise that institutional interest in robo-advice has been muted.
Investment advice has been strongly curtailed following the introduction of the UK’s Retail Distribution Review (RDR) and the EU’s Markets in Financial Instruments Directive II (MiFID II). Both impose bans on commission-based investment advice. Despite the well-meaning objectives of this, it unfortunately means advice is now only the preserve of those willing to pay for it, i.e. the wealthy. EU member state implementation of MiFID II will be varied as countries are reasonably autonomous in how they can impose the requirements. Nonetheless, it is sensible to factor into one’s strategy that commissioned advice will eventually be banned outright in most countries. This is an opportunity for robo-advice, as it could offer services to clients with capital to spend but unwilling or unable to pay for advice. However, investors should still carefully monitor execution costs at robo-advisors.
The Role of Regulation and Distribution
Fund passporting and distribution have existed in Europe for nearly three decades courtesy of UCITS. Fund managers with an institutional bias are given pan-EU distribution rights provided they comply fully with the Alternative Investment Fund Managers Directive (AIFMD). Harmonisation of EU distribution rules has been achieved in most cases. There are, however, divergences – namely around taxation and registration requirements of varying degrees of cost and complexity in multiple EU countries. Efforts are underway to streamline the rules even further through the Capital Markets Union (CMU). It was confirmed recently that a market consultation asking for public comment on easing cross-border distribution would be launched. This consultation will also look at the growing prominence of online platforms in distribution and whether further oversight of this technology will be required. It is believed that CMU will reign in what is left of market fragmentation around distribution within the EU. It is also hoped that CMU will bring about joined up rules on MiFID II’s investment advice provisions.
But it is not just the EU where distribution is changing. Asia-Pacific (APAC) has undergone a huge transformation. Chinese ambitions to internationalise the RMB; encourage MSCI to include A-Shares on its MSCI Indices; stem capital outflows and increase foreign investment has led to considerable reform. The Mutual Recognition of Funds (MRF) is one such example and is likely over time to facilitate heightened cross-border distribution between Hong Kong and the mainland, before being extended elsewhere.
Pan-Asian fund passports bearing hallmarks to UCITS in many areas, such as eased fund authorisations across participating countries, are also being promoted. The ASEAN CIS (Collective Investment Scheme) and Asia Region Funds Passport (ARFP) have not generated the interest many anticipated although this is due to APAC investor bias towards UCITS products. The distribution benefits look promising in theory but there is limited cross-border cooperation or unity on tax or regulation. This is a major flaw, as is the non-inclusion of China or India in the passport schemes. Until these flaws are rectified, UCITS will continue to reign supreme in APAC. As such, UCITS do not need to be sweating just yet at regional upstart fund passporting projects in APAC.
Distribution is changing, and this was a major theme throughout Fund Forum International. Modifying to change, be it regulatory, investor or technological is a must for the industry. Fund managers and distributors should be assessing their business operating models and how they will work and succeed in this changing marketplace. Those that will survive and even flourish in this changing environment are embracing the opportunities and already planning. However, there are others that seem to be waiting until they have a fully defined roadmap – be it either the impact of “blockchain” or new regulations like MIFID II – before enacting a forward-thinking strategy. These organisations may find themselves being left behind.
‘Change is not a destination, just as hope is not a strategy’. Rudy Giuliani