Tech disruptions to the distribution ecosystem

22 May 2015
By Tiziano Giannotti

By Fiona Maciver

A combination of the ever-closer implementation of Mifid 2 and continued Leaps forward in the uses of technology in financial services are giving rise to developments in non-traditional fund distribution. This is particularly the case for two very small channels: direct to consumer (D2C), and a new entrant that has sparked its fair share of headlines – ‘robo-advice’.

▪ Technological developments are creating new playing fields throughout the fund distribution value chain.

▪ The UK’s direct-to-consumer market is the largest in Europe – banks tend to dominate elsewhere.

▪ A new breed of adviser is emerging in Europe: the robo-adviser.

Direct to consumer distribution

Estimates from MackayWilliams show D2C distribution to be a minnow of a channel, accounting for less than 1.5% of European fund assets. It consists of funds distributed on direct-to-investor online platforms and execution-only business placed directly with asset managers. With technology and regulation shifting the distribution landscape, and a need to encourage more people into long-term savings, this channel is looking increasingly attractive; its target audience is clearly on the radar for existing asset managers and market entrants alike. Examples of the former include Deutsche AWM, which is currently developing online solutions, and ING subsidiary NN Group, which is looking to extend its execution-only franchise in key markets(1).

1) ‘ING fund arm to boost online presence’, Ignites Europe, 02/12/2014

Of Europe’s main fund markets, the UK’s D2C channel is the largest. It has been boosted in recent years by the implementation of RDR and the subsequent increase in orphaned clients, leading to a sharp rise in execution-only business with advisers. D2C online platforms, such as market-leading Hargreaves Lansdown, are also a big feature of the UK direct market. According to Platforum(2), D2C platforms’ assets under administration (AUA) stood at £131.9bn as per September 2014. Hargreaves Lansdown has a market share of almost 34% with its nearest rival, Fidelity Personal Investor, lagging way behind in terms of AUA. While the Platforum research reported a decline in the number of overall active investors, proportions of advised and DIY investors increased at the expense of individuals using a blended approach of DIY and advice. They estimate there to be 3.7m direct investors in the UK. So far, the predicted sharp rise in DIY investment has not translated into a significant rise in AUA on D2C platforms, with growth of only 13% since 2013. However, with recent changes to savings and pension legislation and the evolution of digital propositions, we may start to see an acceleration in the years ahead.

2) UK D2C Guide: Direct Platforms and Investors, Platforum, February 2015

Elsewhere in Europe, D2C online platform markets are less developed, with much smaller AUA. Given the dominance of the retail banks in the savings market, and their retreat from long-term funds following the financial services crisis, this isn’t a complete surprise. Banks now appear to be warming to funds once more, and their digital capabilities and client base are a good match for potential development. Indeed, as we have reported previously in Fund Radar, banks in Germany have been ramping up their activity beyond deposits to capture market share through aggressive pricing tactics. For example, four of the leading direct banks, Comdirect, Consorsbank, DAB and Ing-Diba are looking to lure retail investors back into stock investments. In Italy, financial adviser networks dominate the distribution of funds for foreign groups. The Italian Stock Exchange’s launch of a fund platform (so-called ‘dematerialisation’), allowing investors to purchase funds directly, may play a disruptive role in the future, but the consensus of opinion is that it does not pose an immediate threat.

Implications for asset managers

Whether setting up a proprietary digital operation or selling funds through online platforms, tapping into the direct market requires different levels of sales and marketing support. For example, feedback from fund supermarkets captured by Fund Buyer Focus places a higher emphasis on the quality of support that asset managers can provide and the demand for client-friendly marketing material. There are also brand awareness issues to consider, particularly around distributing products in non-domestic markets. Local providers tend to have a significant advantage when it comes to brand recognition. Regulation is another hurdle to overcome. The development of the UK market has highlighted ambiguity in relation to the interpretation of ‘execution only’ and ‘simplified advice’, which has caused some providers to delay delivery of an online proposition, Aviva being one example.

While the macro-environment suggests the existence of opportunities for asset managers in the D2C market, learning how to exploit these opportunities and making the necessary adaptations to business functions takes time and investment. Of course, an added complication of Europe’s fragmented marketplace is the requirement of an element of custom fitting for each market. Technology is helping support new online propositions but also facilitating the extension of business models beyond non-core markets. For example, full service independent advice models are enhancing their propositions in order to offer restricted advice to new clients from the mass retail segment. For investors uncomfortable with self-service and not willing or able to pay for advice, the middle ground of simplified or restricted advice is developing rapidly. The new kid on the block is the robo-adviser.

The advance of the robo-advisers

Technological developments are facilitating the emergence of a new breed of advisers, serving direct investors and providing existing incumbents with opportunities to extend their proposition to new markets. ‘Robo-advice’ is well established in the US distribution landscape but remains a relatively new concept in Europe. That said, plenty of recent press coverage and the emergence of start-ups such as Nutmeg and MoneyFarm have led to this sci-fiesque term becoming firmly rooted in European financial services jargon. Changes to the regulatory environment and a focus on providing low-cost advice have encouraged new entrants to emerge. Is this a passing fad or do they have a long-term future? The jury is still out on this question, but a glance at the more mature US market might provide some guidance. Research by MyPrivateBanking(3) estimates that by the end of 2015 total global robo-advised assets under management will be $20bn, with the US market accounting for 79%. MyPrivateBanking’s projections for growth over the next five years are more appetising. It estimates that assets under management will grow to $450bn by 2020. The participation of big names is expected to provide significant momentum to this market. Towards the end of 2014, Fidelity stepped into this arena, announcing partnerships with robo- advice market leaders Betterment and Learnvest. These relationships enable advisers to target and serve a broader client base, including younger investors who are often priced out of the full-advice market.

3) Robo-Advisors Infiltrating Wealth Management Industry, Robo- Advisors Report 2015, MyPrivateBanking Research

What’s happening in Europe?

As is the norm, Europe is some way behind the US in asset gathering, but there has been notable activity in several markets. With US giants such as Vanguard rumoured to be considering entry into European robo-advice, this may provide a significant catalyst for growth. A recent research paper by Numis(4) for the FCA in the UK highlights some of the threats and opportunities that robo-advisers pose for traditional advisers and asset managers. It also questions whether human psychology will allow us to trust a computer to make investment decisions on our behalf. Inevitably, some will prefer face-to-face advice if they can afford it. For investors caught in the advice gap or preferring an element of DIY, this new breed of hi-tech advice offers a much lower entry point and fees. Whether a computer or a fellow human manages our money, success is ultimately judged according to investor outcomes. Trust and investment performance are therefore the key issues here. For new players, it will take time to demonstrate these and generate brand awareness. But as seen in other industries, good digital business models can rapidly establish a mainstream presence, Amazon being a prominent example. The advance of the robo-advisers could represent a threat to future flows for active managers. So far, propositions have focused on low-cost ETF offerings. Will this expand into the active space? The British provider Nutmeg has criticised the cost of active funds, but it hasn’t ruled out the possibility of including such products in its investment palette.

4) Discussion: Robo-Advice – Disrupter or Distraction?

While we have seen new names emerge in Europe, some existing wealth managers, too, are using this technology to attract new clients. By facilitating lower costs for ‘restricted’ advice, they are able to develop propositions for the mass retail industry and lower the barriers to entry. For example, last month, Fund Radar reported that Swiss private banks are leveraging their experience of ‘robo-advice’ in Asia to open private banking up to the mass retail market with low-cost advice solutions. Swissquote states its proposition very clearly on its website: ‘Your electronic asset manager. ePrivateBanking, an easy and powerful solution’. Market and technological developments are also providing opportunities for asset managers to deliver direct retail-client solutions. The extension of discretionary and model portfolio services has already been seen in the UK through third-party distribution. Some managers are looking to go a step further and offer proprietary services. In the UK, The Daily Telegraph5 recently reported that Investec plans to launch a mass-market online service later this year that will fall under the FCA’s ‘Simplified Advice’ category. And, as mentioned earlier, Aviva is also bringing an online proposition to market, albeit currently subject to delay.

Final thoughts

The two ‘channels’ featured here are in their infancy. They represent both opportunities and threats to asset managers but, more importantly, they provide a platform to open up the long-term investment market to a much broader and deeper base of clients. Tapping into these markets will require investment in technology and a greater understanding of direct investor relationships. The large US firms with considerable experience of developing propositions for their domestic market have a significant competitive advantage here. However, the nuances of each European market mean that each one is marked by a different operating environment. In addition to the technology outlays, managers setting up shop in these markets will have to invest in building brand awareness with end investors.

5) ‘Investec to launch a rival to Nutmeg,’ 06/05/2015