MiFID II is going to profoundly change the distribution model. Equally technology and investor demographics and buying patterns will have a huge impact as well. Distributors must embrace this so as to maintain their position in the market.
The distribution model is likely to evolve over the coming years, especially after MiFID II becomes ingrained in the operating model. Calastone’s study found that 77% of respondents expected competition among distributors to increase, and 68% predicted increased consolidation.
To remain relevant in this rapidly changing technological and regulatory environment, distributors must embrace disruption. This is especially true given the evolving demographics of end clients. Investors are getting younger and are highly in tune with technological innovations such as apps. Distributors must remain relevant and some may look to gain a competitive edge through developing robo-advisory solutions.
Robo-advice is when an investor can be advised on their portfolios through computer-driven services. As commissions have been prohibited across a number of markets including the UK through RDR, robo-advice could be attractive for clients who do not have the disposable income or willingness to pay for investment advice themselves. These commission bans have led to concerns of an advice gap emerging and robotics could play a useful role in fixing this problem.
There has been enormous hype about major technology players – who possess massive amounts of data on their clients – making a tactical move into distribution. These include the likes of Amazon, Facebook or Google, the latter of whom has actually undertaken research into whether establishing an asset management business would make economic sense. Interestingly, only 22% foresaw these players as a threat in the Calastone study.
A study of asset managers by State Street broadly agreed with the Calastone findings. The State Street study found 25% of senior asset management executives believed it was highly likely they will face competition from a non-financial institution such as a technology giant within the next five years. More than half told State Street they suspected such a development would be “somewhat likely” though.
The future for distributors is not entirely clear-cut, according to the Calastone study. A large number of respondents feel distributors will become more selective about the asset managers they work with, or will adopt a strategic shift into the discretionary investment market. Nonetheless, more respondents reckon it is likely distributors will be “squeezed out by fund platforms and wealth managers or else shunned by a new generation of investors.”