Frantic evolution in asset management
Winter 2015/2016

Asset managers are facing significant shifts in the distribution patterns of their core asset pools, due to the combination of a widespread switch to defined contribution pension plans, along with a regulatory agenda which puts the retail investor first: reinforcing investor protection, boosting transparency in performance and fees, and stripping out inducement payments such as trailer fees for distributors.

The fund manufacturing and distribution chain will be disrupted, with a blurring of the traditional roles – as distributors are obliged to provide retail clients with advisory services and walk closer to an asset allocation role, while asset managers get closer to client investment outcomes without overtaxing their portfolio managers. Technology-driven firms will be empowered to side-step today's outmoded product-push solutions.

According to CACEIS and PwC's June 2015 report, Reshaping retail fund distribution: Winning strategies and tactics in a disrupted environment, three main factors are in play. Firstly, regulation – national rules banning rebates to fund distributors in Australia, the Netherlands, Sweden, Switzerland and the UK, together with MiFID II in Europe – is having a far-reaching impact. This is changing the relationship between fund manager and distributor, with distributors no longer able to rely on managers for product-related income. The second factor is Millennials, the next big wave of investors, who will redefine expectations for security, simplicity, transparency, convenience, personalization, product performance and cost. Asset managers will have to respond to this in how they develop and present their brand and products. Thirdly, developments in technology are radically changing business and communication. This will have a big impact on financial advisory practices, where advising becomes virtual, computers replace people and new technology-based business models are developed, putting pressure on older firms to adapt.

Key strategies for asset managers

  • share class re-engineering to strip out inducements to distributors
  • direct platforms (e.g. Fidelity)
  • strategic shareholdings in distributors (e.g. Schroders/Nutmeg)
  • advisory service enhancement (e.g. Vanguard)
  • end-client marketing (e.g. BlackRock).

"In the midst of monumental change, opportunities abound for asset management firms and distributors, but they must understand how to make the most of them," says Olivier Carré, Partner, PwC Luxembourg. "On the one hand, asset managers need to refine product propositions and distribution models. Various strategies are already emerging in the market as players move to secure greater access to investors.

"On the other hand, distributors will have to provide retail clients with enhanced advice solutions, incorporating discretionary management and advisory services with a comprehensive products catalogue. In an environment free of trailer fees, products will become 'cost factors' for the distributors and, as such, the management of the product shelf will be a core competency from a revenue and cost perspective".

"Among the many areas that will impact wealth managers, perhaps the major areas are around inducements, suitability and product costs," Peter Christmas tells us in his capacity as Associate Partner at fast-growing consultancy, Elixirr Partners. "Both inducements and the suitability of products to client needs were significant factors in the UK's retail distribution review (RDR) requirements that firms have had to adhere to since 2013, but both of these will need more work under MiFID II. With respect to charging, many wealth managers are used to disclosures about their own fees, platform fees etc., but the requirements under MiFID II go much further, causing firms to look in detail about the products they are selling and where the necessary detailed information will come from."

For now, a growth area is robo-advisor platforms – a halfway house between execution-only services and the traditional wealth management offering of advisory or discretionary management involving face-to-face contact. The new platforms, typically offering simplistic advice, include Nutmeg – which attracted Schroders as a major investor in June 2014 just two years after going live. Investec has built a similar platform, Click & Invest. In February 2015, Ignition Wealth became the first automated advice firm to get an Australian financial services licence. Vanguard Group in the US ran its Personal Advisor Services platform for two years in pilot mode – attracting $7bn of new assets – before an official launch in May 2015.

Aberdeen Asset Management is making inroads into the direct-to-retail space through a tie-up with Hymans Robertson which involves a first-time offering, beyond corporate pension schemes, of Hymans' GO (Guided Outcomes) digital actuarial pensions forecasting tool for setting and tracking a retirement income target. Other managers have been reluctant to establish their own distribution so far, with Hendrik Du Toit, Founder and CEO of Investec Asset Management warning that "direct delivery is dangerous unless you are fully geared up for it" yet pointing to the need for firms to step up to offering a level of service as if they have gone direct.

BlackRock and Fidelity stand out as two firms which are building strong digital brand recognition among end-clients in the retail space. This is expected to be of increasing importance, especially with the emergence of investor communities on social media and a trend towards mirrored investing.

Asset managers will face similar challenges in the institutional space, with a significant shift in distribution patterns across the corresponding asset pools. The character of the pensions asset pool is changing, due to a wholesale switch from defined benefit (DB) to defined contribution (DC) pension plans in many markets. Looking specifically at the United Kingdom, by far the largest DB market in Europe, Will Mayne, Principal of Spence Johnson says: "We predict that DB assets will peak by 2022 and then decline over time. We believe that pension payments have already exceeded contributions, so outflows are already taking place."

The UK's £1140bn in DB assets are not likely to go anywhere rapidly. "We expect DC to continue to trail DB in terms of asset numbers for over 10 years to come," notes Mr Mayne. But he points out that the nature of DB assets will change significantly. "DB de-risking, as liabilities mature, will drive the growth of matching assets. New distribution paths will also open up as fiduciary management grows into a more dominant DB market solution. Cash flow matching will become more important for schemes, including handling new challenges like DB to DC transfers." The DB and DC worlds, often viewed in the same way, are very different, and solutions for the retail sector are likely to be equally applicable to the DC plans – leading to a 'retailization' of much of the pensions pool.





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Asset managers are facing significant shifts in the distribution patterns of their core asset pools, due to the combination of a widespread switch to defined contribution pension plans, along with a regulatory agenda which puts the retail investor first: reinforcing investor protection, boosting transparency in performance and fees, and stripping out inducement payments such as trailer fees for distributors.

The fund manufacturing and distribution chain will be disrupted, with a blurring of the traditional roles – as distributors are obliged to provide retail clients with advisory services and walk closer to an asset allocation role, while asset managers get closer to client investment outcomes without overtaxing their portfolio managers. Technology-driven firms will be empowered to side-step today's outmoded product-push solutions.

According to CACEIS and PwC's June 2015 report, Reshaping retail fund distribution: Winning strategies and tactics in a disrupted environment, three main factors are in play. Firstly, regulation – national rules banning rebates to fund distributors in Australia, the Netherlands, Sweden, Switzerland and the UK, together with MiFID II in Europe – is having a far-reaching impact. This is changing the relationship between fund manager and distributor, with distributors no longer able to rely on managers for product-related income. The second factor is Millennials, the next big wave of investors, who will redefine expectations for security, simplicity, transparency, convenience, personalization, product performance and cost. Asset managers will have to respond to this in how they develop and present their brand and products. Thirdly, developments in technology are radically changing business and communication. This will have a big impact on financial advisory practices, where advising becomes virtual, computers replace people and new technology-based business models are developed, putting pressure on older firms to adapt.

Key strategies for asset managers

  • share class re-engineering to strip out inducements to distributors
  • direct platforms (e.g. Fidelity)
  • strategic shareholdings in distributors (e.g. Schroders/Nutmeg)
  • advisory service enhancement (e.g. Vanguard)
  • end-client marketing (e.g. BlackRock).

"In the midst of monumental change, opportunities abound for asset management firms and distributors, but they must understand how to make the most of them," says Olivier Carré, Partner, PwC Luxembourg. "On the one hand, asset managers need to refine product propositions and distribution models. Various strategies are already emerging in the market as players move to secure greater access to investors.

"On the other hand, distributors will have to provide retail clients with enhanced advice solutions, incorporating discretionary management and advisory services with a comprehensive products catalogue. In an environment free of trailer fees, products will become 'cost factors' for the distributors and, as such, the management of the product shelf will be a core competency from a revenue and cost perspective".

"Among the many areas that will impact wealth managers, perhaps the major areas are around inducements, suitability and product costs," Peter Christmas tells us in his capacity as Associate Partner at fast-growing consultancy, Elixirr Partners. "Both inducements and the suitability of products to client needs were significant factors in the UK's retail distribution review (RDR) requirements that firms have had to adhere to since 2013, but both of these will need more work under MiFID II. With respect to charging, many wealth managers are used to disclosures about their own fees, platform fees etc., but the requirements under MiFID II go much further, causing firms to look in detail about the products they are selling and where the necessary detailed information will come from."

For now, a growth area is robo-advisor platforms – a halfway house between execution-only services and the traditional wealth management offering of advisory or discretionary management involving face-to-face contact. The new platforms, typically offering simplistic advice, include Nutmeg – which attracted Schroders as a major investor in June 2014 just two years after going live. Investec has built a similar platform, Click & Invest. In February 2015, Ignition Wealth became the first automated advice firm to get an Australian financial services licence. Vanguard Group in the US ran its Personal Advisor Services platform for two years in pilot mode – attracting $7bn of new assets – before an official launch in May 2015.

Aberdeen Asset Management is making inroads into the direct-to-retail space through a tie-up with Hymans Robertson which involves a first-time offering, beyond corporate pension schemes, of Hymans' GO (Guided Outcomes) digital actuarial pensions forecasting tool for setting and tracking a retirement income target. Other managers have been reluctant to establish their own distribution so far, with Hendrik Du Toit, Founder and CEO of Investec Asset Management warning that "direct delivery is dangerous unless you are fully geared up for it" yet pointing to the need for firms to step up to offering a level of service as if they have gone direct.

BlackRock and Fidelity stand out as two firms which are building strong digital brand recognition among end-clients in the retail space. This is expected to be of increasing importance, especially with the emergence of investor communities on social media and a trend towards mirrored investing.

Asset managers will face similar challenges in the institutional space, with a significant shift in distribution patterns across the corresponding asset pools. The character of the pensions asset pool is changing, due to a wholesale switch from defined benefit (DB) to defined contribution (DC) pension plans in many markets. Looking specifically at the United Kingdom, by far the largest DB market in Europe, Will Mayne, Principal of Spence Johnson says: "We predict that DB assets will peak by 2022 and then decline over time. We believe that pension payments have already exceeded contributions, so outflows are already taking place."

The UK's £1140bn in DB assets are not likely to go anywhere rapidly. "We expect DC to continue to trail DB in terms of asset numbers for over 10 years to come," notes Mr Mayne. But he points out that the nature of DB assets will change significantly. "DB de-risking, as liabilities mature, will drive the growth of matching assets. New distribution paths will also open up as fiduciary management grows into a more dominant DB market solution. Cash flow matching will become more important for schemes, including handling new challenges like DB to DC transfers." The DB and DC worlds, often viewed in the same way, are very different, and solutions for the retail sector are likely to be equally applicable to the DC plans – leading to a 'retailization' of much of the pensions pool.