Plotting a route to the end-investor

20 December 2016
By Tiziano Giannotti

By Fiona Maciver

From servicing legacy assets to launching new business propositions, firms across the value chain are showing a lot of interest in the end-consumer – the ultimate beneficiary of the services they are providing. As the landscape currently stands, the direct to consumer (D2C) channel represents a tiny chunk of Europe’s overall asset pool, but will it grow, and does it make sense for asset managers to stray into distribution territory?

▪ The UK is the largest direct-to-consumer market in Europe but propositions are being developed across the Continent. ▪ Digital innovations are facilitating deeper and more meaningful interactions with end-investors. ▪ Robo-lessons from the US highlight the difficulties of building sustainable D2C business models.

The direct market

Direct-to-consumer propositions come in various guises across Europe and are further complicated by the rich mix of distributors, market dynamics and cultural differences to be found. The retail market in Continental Europe is primarily served by the retail banks and their networks of tied agents, a handful of D2C platforms and, more recently, new digital solutions including robo-advice from existing incumbents and new tech start-ups. If we exclude retail banks from the equation, the D2C market for long-term investments is miniscule. Europe’s largest and most dynamic D2C market is the UK (albeit small relative to other local channels), which is primarily served through DIY investment platforms or fund supermarkets run independently, or by insurance companies or asset managers (the most significant of the latter being Fidelity). JP Morgan flirted with an open architecture D2C solution in the past but retreated from selling third-party funds to focus on its core business. In the wake of RDR in the UK, a sharpening focus on the cost of investing has sparked fee cuts and consolidation in this highly competitive arena. The consolidation trend is likely to continue in 2017 as margins are squeezed and the survivors battle for scale. In addition to the B2C platforms, some managers offer direct investment on their websites or via post. These are relatively passive acquisition strategies, with most groups highlighting how to buy funds through advisers and fund supermarkets. The different methods of access and lack of comprehensive statistics relating to this area make market sizing very difficult. According to financial services consultancy The Lang Cat, the UK D2C platform market’s assets under administration stood at €132bn in 20151. The UK’s market-leading distributor, Hargreaves Lansdown, re- 1 Come and have a go: Rise of the machines, The Lang Cat, 2016 ported assets under administration of £61.6bn (~€69bn) as per 30 June 20162. Retail-specific distribution channels can experience capricious demand from investors when investment conditions are tough. This doesn’t necessarily equate to severe outflows, but rather a sudden curtailment of inflows (the UK is an exception, with IFAs outsourcing management to discretionary portfolio managers in the wake of RDR, who in turn tend to bulk-switch investments on platforms). Retail money can often prove to be sticky and high margin and some groups have large legacy books of D2C clients that they continue to serve.

Motivation and merits

Managers have operated successfully for many years disentangled from retail investors, with distributors intermediating between the two – but times are changing, and rapidly. A disruptive cocktail of the digital age, regulatory initiatives and economics is forcing distributors and manufacturers across the value chain to review their business models. The boundaries between traditional manufacturers and distributors are becoming more blurred as firms look to protect revenues in an increasingly competitive environment. The merits of independent asset managers moving into the direct space provides plenty of fuel for debate, and no doubt this is a subject that has cropped up in a many a boardroom. There are a number of obvious issues that spring to mind: the cost of customer acquisition vs revenue generation, the risk of biting the hand that feeds (ie distribution partners), and how to bridge the gulf that exists between asset managers and the end-consumer. The latter point is a particularly significant barrier to entry for a direct strategy. For some time,

Who’s playing?

The level of involvement in the direct market varies from group to group. Schroders is an example of a major player that has received some accolades for its digital initiatives, including the IncomeIQ campaign. Meanwhile other firms, including Aberdeen and Columbia Threadneedle, are developing apps to sell their funds. As standalone propositions, it is difficult to see how promoting only in-house products can generate tangible results without a massive investment in brand and the ability to deliver scale. That said, consumers in general are relying more and more on their own online research into companies these days, and expect to be able to purchase products through multiple channels. Digital developments are making it much easier to On board and service direct clients, and clearly numerous firms have chosen to explore this path. To look after legacy clients, it makes a lot of sense to exploit the increasing use of mobile applications in the improvement of customer services and to satisfy the needs of the digital savvy. The Dutch manager, Robeco, originally established its online offering to service both an existing book of direct investment and to target new mass-affluent investors. Its digital strategy has since evolved and now includes a mobile app. Its success has also encouraged other firms to look at bringing clients into the fold via mobile devices. While Robeco is currently focusing on its domestic market, another Dutch fund manager, NNIP, has extended its D2C platform to Poland and the Czech Republic. Recognising the potential of digital developments, some managers have developed strategic partnerships to accelerate their knowledge and involvement in this fast-paced field. Schroders has taken a stake in the British robo-adviser, Nutmeg, while Aberdeen has acquired the digital platform-solutions provider, Parmenion. The latter looks to be a shrewd move, providing an additional revenue stream combined with digital-innovation know-how to support its distribution of funds. Parmenion is one of the UK’s most highly rated platform providers, supporting more that 1,000 advisory companies with digital solutions. Robo-onset? Of course, a D2C discussion is not complete without mentioning robo-advice. Europe is some way behind the US on asset gathering in this realm but there has been significant activity from start-ups and more recently from larger players. A similar scenario is expected by industry pundits to play out in Europe. The largest player in Europe, Nutmeg, has yet to report a profit and its AUM is rumoured to be less than £0.5bn (~€0.6bn). Recently, it has received further financial backing to grow the business, including the development of an element of human advice for its service, which is giving rise to another new piece of jargon: ‘cyborg advice’! Vanguard plans to launch a direct proposition in the UK in 2017 as does UBS, the global wealth manager, the latter with an offer called SmartWealth. Technology should enable the Swiss global wealth manager to move downstream and capture the attention of younger, less affluent clients, albeit still remaining beyond the reach of the mass retail investor, with a minimum investment set at £15k (€16.7k). Set to launch in the UK in early 2017, the company will offer passive and active solutions to clients, before rolling out the proposition to other parts of Europe and Asia. As mentioned earlier, the UK is the most advanced D2C market on the eastern side of the Atlantic. It is a segment that Fidelity, for example, knows particularly well. Aside from its long established FundsNetwork fund supermarket, it recently launched a ‘beta’ version of its Fidelity Personal Investing service, with a friendlier front-end and guided advice relevant to millennial investors looking to achieve particular savings goals.

Can independent managers thrive in D2C?

We expect the direct to consumer market to grow, albeit at a slow pace initially. With advances in technology and the younger generations less dependent on interaction with a face-to-face adviser, the omens are good for longer-term development. However, aside from the behemoths like Vanguard and Fidelity, which benefit from a clear proposition, scale and strong consumer-facing brand, asset managers are unlikely to achieve significant traction in this channel. There is instead plenty of opportunity for managers and distributors to learn and adapt their products and services to provide a better experience for the end-investor – for example with an omni-channel strategy – and ideally to mutually reiterate the value of each link in the distribution chain. Given their high profile among consumers, Europe’s retail banks are, on paper at least, in a strong position to have the biggest impact thanks to large customer data sets and substantial experience of developing online client solutions. Insurance companies are also in a more favourable position than independent asset managers to make a difference. There is of course also the possibility of a left-of-field entrant such as an industry equivalent of Amazon, Google or Uber. Time will tell. Given the current pace of innovation from the fintech sector, we expect to see many more interesting market developments in 2017 and beyond. The challenge will be to adapt and evolve in order to differentiate propositions and deliver optimal client outcomes. Indeed, as distributors and asset managers jostle for position in the D2C landscape, let’s hope that it is the end-customer who emerges as the true winner, with more palatable and efficient product offerings available to all.