The shifting sands of distribution

11 July 2018
By Tiziano Giannotti

By Fiona Maciver

Six months on from the implementation of Mifid 2 and Priips, Europe’s new distribution landscape is slowly evolving as business models adapt to the regulatory developments. Meanwhile, the blurring of the boundaries between asset managers and distributors continues, with both sides moving into new territories and adopting vertically integrated models, resulting in the emergence of the ‘distributor-manager.

▪ Changes to the value chain are gathering pace in the post-Mifid 2 era.

▪ Retail banks place the least importance on price in the fund-selection process while fund supermarkets are the most price-sensitive distribution channel.

▪ Aside from lower fees, fund buyers would like to see improved share-class options and transparency.

Changing value chain

In recent years, the pre-existing complexities of Europe’s distribution landscape have been amplified. New technologies, growth in usage of passive strategies, and regulatory change have been at the forefront of transformation across the value chain – shifting the balance of power and squeezing asset managers’ profit margins. Retail banks, for example, have become almost inaccessible to all but the largest asset managers, and assets are more heavily concentrated among the banks’ top providers, in comparison to other distributors. This channel is also switching to different product types, one manifestation of this being an increasing focus on sub-advisory relationships with asset managers. In other channels such as advisory portfolio management, there are signs of more concentrated allocations and a reduction in the number of asset managers with whom they work. But this trend is not universal, and is to an extent offset by a broader pool of asset managers being used by the wider distribution community as they seek to differentiate their offerings. Access to distribution opportunities is changing in tandem, with some doors closing as others open.

The role of price in fund selection

In the quagmire of headlines on fees and pricing pressure, it’s easy to lose sight of what fund selectors and end-investors actually require from assets managers. Our research into European fund buyers’ views on the industry puts some context around this. One of the many questions they are asked is: ‘Apart from fund performance, what are the most important criteria for the selection of your provider?’ The table on the previous page shows the aggregated pan-European responses, and price is ranked in 7th place (around 20% of interviewees deem this to be a key criteria for picking a particular fund provider). This is a useful reminder that the vast majority of buyers are focused on receiving a fully rounded service more than simple price satisfaction, with quality of the fund management team, risk management, and investment strategy the leading selection criteria. There has nevertheless been a gradual rise in the importance of pricing as a selection criterion over the past few years, so its role in the mix is becoming weightier. Delving into distribution-channel data provides another layer of insight. For example, retail banks place a lower emphasis on pricing in their fund selection, with coverage of business, risk management and support services having a higher weighting. Meanwhile, fund supermarkets appear to be the most price-sensitive distributors, rating pricing as the third top selection criterion, behind coverage of business demand and support services. While price is by far the most important driver of success in the fund-selection process, asset managers must still demonstrate value for money in their product offerings and be aware of price sensitivities across channels and markets. Margins will remain under considerable pressure, with distributors in turn also having to offer good value to the investor.

Pricing improvements

In this world of increased transparency, distributors and end-investors have become more aware and demanding of better pricing policies. Aside from an obvious appetite for lower prices (everyone loves a free lunch!), European fund selectors are quite clear about the specific areas where they would like to see pricing improvements, with the top demands centred on share classes and increased transparency. The chart overleaf visualises the top pricing-improvement needs. The topic of share classes receives some of the most wide-ranging and polarised comments from fund selectors. The UK ban on retrocessions, implemented in 2013 through RDR, was the trailblazer for a broader European share-class evolution and the introduction of ‘clean share classes’ with trail payments stripped out. Asset management groups with funds available in the UK and wider Europe came under pressure to offer clean share classes elsewhere, regardless of whether commissions were levied on the end client. More recently, the implementation of Mifid 2 has provided additional impetus and an explosion of new share classes. But distributors are in two minds, with some calling for more share classes, while others believe the current plethora of options contributes to a state of confusion. For the uninitiated, selecting the most appropriate share class is a minefield, particularly for do-it-yourself retail clients. Even for people with a modicum of investment knowledge, using a fund platform to select the best share class can be a tough task if a fund has many on offer, and may act as a turn-off. The selector comments on the previous page highlight some of the concerns they hold on the matter of share classes. And then there is the thorny issue of institutional and retail share classes. Distributors see room for improvement here too, as exemplified by the following comment from a fund buyer at a Swiss retail bank: ‘Looking at the different share classes, the question arises why a higher TER is justified for retail share classes when they are managed the same way as institutional share classes. In principle, all share classes should be treated like the institutional share classes and the additional advisory fees from banks should be shown separately.’