Another repeated section of the survey looked at distribution channels. Respondents were asked to rank the importance of six channels in their country or region. As in last year’s survey, banks were the most important channel overall, followed closely by fund platforms (see figure 17). Insurers came in third, replacing independent financial advisers (IFAs), who occupied third place last year.
The order of priority depended on a respondent’s location, however. Figure 17.1 shows that respondents in the UK were much less likely to put banks first on the list than their peers in Europe. For UK respondents, independent financial advisers (IFAs) were the top channel.
This finding indicates that the importance of distribution channels varies greatly from country to country.
The ranking looked different in the following question, when we asked respondents to predict which will be the most important distribution channels in ten years’ time (see figure 18). Here, direct-to-consumer channels came top overall.
As we observed in last year’s report, the priority placed on direct-to-consumer channels is interesting because consultants have argued that only a subset of asset managers, namely big firms with well-known brands, will realistically succeed with this strategy.
It remains to be seen if the growth in direct-to-consumer sales will be a further spur to industry consolidation.
Funds and fees
The final section of the survey looked at trends in product demand. One of the most significant developments in the funds business in recent years is the rise in indexing as opposed to traditional actively managed funds. A total of 59% of respondents said they thought passive funds, such as exchange-traded funds (ETFs), would take over from actively managed funds as the core investment product for mass retail customers (of which 15% strongly agreed with the statement: see figure 19). This was a slight increase on the 57% of respondents who agreed with the statement when the same question cropped up in last year’s survey.
We then asked respondents to say if they thought passive funds, such as ETFs, would take over as the core investment product for sophisticated investors, such as institutions, wealth managers and high-net-worth individuals. A total of 30% thought they would (of which 5% agreed strongly with the statement: see figure 20). This was exactly the same proportion as agreed with the statement in last year’s survey, though at that time, slightly more people agreed strongly.
As in last year’s survey report, we observe a belief among our respondents that sophisticated investors are more likely to require actively managed funds than retail investors. This finding may provide a clue as to which types of investor the traditional active managers will seek to target with their marketing.
What about the trend for robo-advisers, otherwise known as algorithm-based services that provide automatic financial advice in response to user inputs? Slightly less than half of respondents (48%) said they thought robo-advisers would become the main distribution channel for raising assets from the mass retail market (of which 8% held the view strongly: see figure 21). This was a rise of six percentage points compared with last year’s survey, when a total of 42% said they agreed with the statement.
If these results are anything to go by, there appears to be a rising belief in the commercial value of robo-advice as a tool for raising assets from retail investors. It will be interesting to see if this trend continues.
The last question was new for this year’s survey and tackled the question of fees. We asked our respondents if there would be a move away from the annual management charge to types of performance-based fees for standard mutual funds. A small majority (55%) said they thought there would be (of which 3% strongly agreed: see figure 22). Although this was not a decisive result, it shows a significant interest in performance-based fees, which suggests asset managers are likely to bring in more products offering these structures in future.
Our respondents may have been reasoning that the potential benefit, in terms of improving investor confidence and trust in their managers, is worth the additional work required to administrate these different types of fees.
Conclusion
This study has revealed concerns among our respondents that regulatory costs are eating up resources that might be deployed elsewhere. Two-thirds of respondents said that if their regulatory costs fell to zero, the money would be spent on technology investment. What kinds of technologies would attract this investment? An indication was given by figure 9, which found that the back office is seen as the biggest priority for investment. Another relevant finding, shown in figure 10, was that respondents believed that distributed ledger technology, known as blockchain, would have the biggest impact on the funds business.
Clearly, regulation and technology are intimately linked. According to our research, a fall in the cost of regulatory compliance would lead to a rise in investment in areas such as blockchain. That could lead to efficiency savings across the industry and, ultimately, a better experience for the end investor.
There is another possibility: technology may itself help to bring down the cost of regulatory compliance. If so, a virtuous circle might be created in which technological progress unlocked investment for more technology.
Regulation is a challenge. Technology may be both solution and prize.
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