Our Insights

Distribution Disruption

Distributors eye expansion opportunities

To remain relevant in the evolving and increasingly competitive financial services industry, fund distribution must be open to change to avoid the potential risk of disintermediation by disruptors. The drivers of change, however, will not be exclusively technological, but also regulatory and client-led.

Key insights

  • Distribution is vulnerable to regulatory, demographic, and technological change, and the industry must continue to reinvent itself to remain relevant
  • While robo-advisors have not grown as quickly as many anticipated, all eyes are now firmly on the big technology players, and their ambitions in the fund distribution market

Regulators set the framework

Post-financial crisis, market regulators introduced a number of rules, many of which were designed to protect consumers and prevent unsuitable products being offered to retail investors. For example, the recent Markets in Financial Instruments Directive II (MiFID II) enhanced suitability requirements to take into consideration the use of new technologies, such as robo-advisors.

Panellists at FundForum in Berlin acknowledged that further regulations and restrictions would inevitably be introduced in response to significant market events. Regulators could, for example, introduce more prescriptive rules governing the type of products distributors can sell to retail clients, an outcome which would have a significant impact on the industry. As a result, it is the responsibility of distributors to ensure they maintain high consumer protection standards, in order to future-proof a business model that could be impacted by regulatory change.

Clients become global


The drivers of change will not be exclusively technological, but also regulatory and client-led

Millennials, according to the US Census Bureau, are on the cusp of surpassing baby boomers to become the country's largest living adult generation.1 Any industry that wants to preserve its dominance and longevity must ensure that it can meet the often different needs and requirements of multiple generations. At present, distributors are struggling to attract millennials, for a variety of reasons.

Younger people tend to be highly mobile, living and working in multiple countries, but fund distributors are frequently siloed in individual markets. Admittedly, the fragmentation of distributors on a country-by-country basis is predominantly a consequence of regulation, but experts at FundForum said the industry needs to think beyond national boundaries if it is to thrive and win mandates from millennial investors.

The time for the robo-advisors to shine

Any industry that wants to preserve its dominance and longevity must ensure that it can meet the often different needs and requirements of multiple generations

Among the challenges currently faced by the distribution market, technology is the most pressing risk. Younger retail investors are highly tech-literate, using smart devices to transfer money, order food, and book transportation among other conveniences. Yet many fund distributors continue to rely on manual processes. Robo-advisors risk disintermediating distributors if technology infrastructures do not keep pace.

Robo-advisors are accessible, low cost online tools that assist retail clients in selecting and investing in funds. Their popularity may be enhanced further with the implementation of MiFID II, which bans inducements. This means investors now need to pay for advice, which many are hesitant to do. As a result, robo-advisors provide an appealing alternative platform for advice-deprived investors looking for guidance on fund selection.

Despite their pricing advantages, many robo-advisors have not achieved scale, which is critical if they are to obtain sustainable revenue streams and and maintain their business model .2

Big tech turns on the pressure

The fund industry should also be on alert for the technology giants such as Google, Apple, Facebook and Amazon, as they have the potential to disrupt not just the asset management distribution chain, but financial services as a whole.

The likely imposition of strict data regulations following a series of high-profile cases of data misuse could spur technology companies to move into asset management and distribution. Some of these technology giants have already transitioned into other areas of financial services, such as payments, with Apple and Goldman Sachs reportedly developing a new credit card product.3

Not only do these technology giants have extensive brand loyalty, but they are endowed with robust balance sheets. Apple, for example, is poised to become the world's first trillion-dollar company,4 leaving it with enormous capital reserves to invest in the development of new products and services such as fund distribution. Unlike distributors, many of these technology giants are not burdened with legacy systems, putting them in a prime position to leapfrog the current incumbents.

The unknown unknowns

Not only do technology giants have extensive brand loyalty, but they are endowed with robust balance sheets

Arguably, the company that disrupts the status quo may not even exist yet. While technology companies have unprecedented global footprints, trust has been eroded in the sector following a series of well-documented data breaches. An expert at FundForum highlighted that the disruptor of tomorrow could be a company that leverages new technology but which is also sustainable and supports positive societal change. Such an enterprise would exercise enormous influence on younger investors, many of whom take a firm interest in such issues.

 

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