Greater connectivity through technology will spur on cross-border fund investment, says Calastone’s Edward Glyn, who discusses future trends in distribution based on a recent survey.
Earlier this year, Funds Europe and Calastone collaborated on research into the future of funds distribution. The survey looked at the factors driving firms’ distribution strategies, their investment in technology and how the distribution process could be improved.
While the answers showed that the industry is generally moving in the same direction globally, there are some interesting regional differences when it comes to the rate of adoption of new technology and the priorities. Some of this is down to the legacy infrastructure and different demographics of regions and countries, as well the relative maturity of the respective investment markets and the adoption rates for new technology.
One of the least surprising findings from the survey was the universal appeal of ESG funds, says Edward Glyn, managing director and head of global markets at Calastone.
When asked for the factors driving firms’ future distribution strategy, ESG was one of the most cited factors by all regions.
As ESG standards develop – such as Europe’s Sustainable Finance Disclosure Regime (SFDR), a regulation that requires investment firms to classify their ESG funds and provide disclosures so that a fund’s sustainability credentials can be scrutinised – there will be a greater focus on data for fund managers, service providers such as custodians, and investors, Glyn says.
Partly designed to combat greenwashing, SFDR disclosures aim to make it easier for investors to compare ESG funds.
Elsewhere in the survey, digital technology’s role in the funds industry is highlighted. Glyn says the industry is “only at the beginning” of a trend that will accelerate as firms continue to expand the capability of their back-end systems.
He adds: “This is done to reduce cost and risk, but also to extract back-office data and use it to enhance client-facing apps and systems in the front office.
“It is the same approach adopted by fulfilment apps like Amazon where back-office data and distribution-related data can be used to streamline the supply chain, inform product development and, crucially, improve the customer or investors experience.
One of the survey’s questions that produced much more regional disparity asked whether fund managers were likely to create their own wealth management divisions. Asia and the UK were the only regions in which more than half of the responses were positive (50% in Asia and 56% in the UK).
One of the reasons for this disparity is the relative sophistication of the retail investment markets, says Glyn. “The US and Australia have a rich savings tradition among their populations, but in some of the less mature markets, we will see a much greater shift to D2C markets. Consequently there will be a much greater demand for advisory services in those markets.”
One reason for the D2C focus is the massive transfer of wealth from one generation to the next that will take place over the next decade. Another is the emergence of new technology that has enabled asset managers to go to new places with less friction, less expense and more data, says Glyn.
This trend is most clearly seen in the M&A activity in the platform space in the UK especially, where in the past few weeks asset manager abrdn has struck a £1.5 billion agreement to acquire funds platform Interactive Investor.
However, says Glyn, the lack of harmony between the different distribution models employed by different countries, even within the EU, should be noted as an obstacle for the development of a global D2C funds offering.
Client acquisition continues to be a challenge for the funds market and financial services. It is not just cost but complexity, with anti-money laundering and Know Your Customer obligations to be met. Respondents in all regions cited ‘simpler client onboarding’ as the best way to improve accessibility for existing and new investors. Glyn says this is particularly important as firms target the D2C market. Customers will rightly question why they can easily sign on to Amazon or health authorities’ contact tracing apps with relatively few problems but cannot so easily sign up to an investment platform.
“The financial services market needs to be better at this,” says Glyn.
Beginning of a journey
The survey also looked at how the use of fund vehicles might change in the future. While there continues to be a focus on the use of ETFs, especially in the US, we are only just at the beginning of the tokenisation journey. But the disparity is less on a regional basis and more to do with individual firms, says Glyn.
“There are those firms that are fully committed to tokenisation and developing products. They have put tokenisation at the centre of their business and are looking to take a personalised service that has only been available for HNWIs and make it scalable and available on a broader basis. Then there are those that are watching from the sidelines,” says Glyn.
That said, when asked where technology investment will be directed in the future, it is clear that distributed ledger technology (DLT) will take over from data handling and regulatory reporting as priorities. Firms have realised the value of data and have fixed many of the problems they faced in terms of data management, says Glyn.
They have also realised what DLT can add to the use of data. “Blockchain and DLT enables the funds market to evolve from one that moves data, by sending it from one participant to another, to one that shares data, where all parties can see the same data in real-time,” says Glyn. “Once you are able to treat data in this way, it enables you to use new technology to develop new business models and pursue developments like mobile apps and mass personalisation.”
As the global market becomes more open, connectivity, market access and speed to market will all become more important for firms’ distribution efforts, says Glyn. “Some national funds markets have traditionally been domestically focused, but the cross-border market will grow as we develop greater connectivity between participants.
“That becomes much more effective in a DLT environment because as you remove friction, volume goes up and cost and risk both go down. So, we will see a significant investment in this space.”
(First published in Funds Europe 12/21: https://www.funds-europe.com/december-2021/sponsored-feature-one-direction-for-fund-distribution)