CacoonAs specialised fund managers grow in size and reputation some will be able to haggle with their distributors on the portion of commission they give away, finds Angèle Spiteri Paris The operating model for distribution in Scandinavia is changing as some independent fund managers are cutting the commission they offer and the possibility of a ban on rebates looms on the horizon.    Norwegian native manager Skagen has reviewed its distribution agreements and cut rebates from 75bps to 50bps. And with Skagen Kon-Tiki, a product that returned 43.1% over the last three years and around 74% over the last five, the firm is in a strong position to haggle. Åge Westbø, deputy chief executive officer and one of the founders of Skagen, says: “If you have a strong product, you’re in a better position to manage your relationship with the distributors. We had to make them understand that for us, managing money is not a volume game. Clients need to make sure they understand what they’re getting from our products otherwise we risk jeopardising the liquidity of our funds.” The manner in which Skagen has dealt with this is to review its alliances with distributors. “We’re turning it into a partnership, a long-term relationship with a clear understanding of who is getting what,” says Westbø. Obviously, this review was not welcomed by all distributors. “There were some who liked it and some who didn’t. In the case of those that didn’t like this kind of relationship, we simply cancelled our agreement,” he adds. The question is, what is Skagen doing with the money it is saving on distributor rebates? “We’ve reduced our rebate to distributors,” Westbø says. “This cost-saving has given us the opportunity to take care of our employees and show them our appreciation. We value the importance of human capital and know that people need to be compensated for their work in order to stay with the firm.   “Also, The money we save in trailer fees can be redirected to strengthening our client reporting facilities and attending to the increasing regulatory burdens around risk reporting.” But Skagen seems to be an anomaly in the Nordic markets. None of the other asset managers Funds Europe met in the course of its travels to the region was reviewing the rate of commission they give their distributors. A firm such as Carnegie hasn’t had the luxury of leverage in its dealings with distributors. Hans Hedström, president of Carnegie Fonder, says: “We haven’t been in the situation where we can negotiate distributor rebates.” This is largely because of the firm’s recent history. In September last year, Carnegie acquired HQ Bank and HQ Fonder, which were in liquidation. Hedström says: “We were HQ Fonder, with HQ bank being the company’s sister company. When the bank collapsed, distributors were afraid to be connected to the HQ name.” The HQ Fonder part of the business has since been re-branded as Carnegie Fonder, but perceptions don’t change overnight. “Things have improved and have stablised, to a point, but it’s not the same as it was a year ago,” he adds. East Capital is also not reviewing its rebate arrangements with distributors. Albin Rosengren, CEO and head of sales, says: “There are few distributors that take up the issue of rebates and ‘kickbacks’ with us but I can’t really say that I’ve seen a trend for asset managers to give distributors a lesser share.” However, it is widely acknowledged that the relationship between distributors and asset managers is often strained. Westbø says: “There has always been a struggle in the relationship between producers and distributors. It’s two-fold: the distributor has to have a strong relationship with its clients, and the producer has to offer a product that can deliver robust performance.” Hedström adds: “Going back a few years, it was the distributor that set the terms. Now that has changed – not that they’re coming to us and asking for more money. Rather, it’s become more important to have a strong brand and a strong product to offer the distributor.” Regulation
The change in the essence of the relationship between distributors and asset managers could be brought about by force, through regulation. “We are going to see changes to the distribution model but they could be for regulatory reasons rather than internal pressures,” says Hedström. “Distributors could be forced to be more open about what they’re paid in ‘kickbacks’. Clients could be very surprised that the distributor takes a portion of the management fee.” A more extreme scenario, which is highly likely, is that distributors will not be allowed to take rebates. Jessica Malmfors, CEO of Skandia Fonder, says: “There is a regulatory discussion about rebates and there is a fear that they will be banned. With Ucits IV and the MiFID review this could happen sooner rather than later. Part of the MiFID review could be interpreted as prohibiting rebates.” Jonatan Holst, acting chief press officer at Finansinspektionen (FI), the Swedish regulator, says: “We believe that a ban on ‘kickbacks’ is what is needed to ensure consumers get the best and most independent financial advice possible. We have petitioned the EU Commission to look at the issue, along with the Swedish government. We would not propose a reform like this if we didn’t want to see it implemented.” Hedström adds: “This [banning of rebates] will mean that distributors would have to charge clients for their service and asset managers will have to lower their fees.” Certain managers in Norway have already had to deal with changing business models as a result of regulatory developments. Robert Wood, director of strategy and business development at Storebrand Fondene, a Norwegian manager, explains: “In July 2010 the Norwegian FSA decreed that financial advisor compensation that is tied directly to subscription fees or that is structured in such a way as to be in conflict with customer interest would be viewed as bad business practice and is illegal. The market is moving rapidly away from subscription fees and on to other business models.” He says that as a way around this, the firm may consider offering distributors a net fee class in which the rebate is deducted from the fund’s management fee so that they are, in effect, buying at a reduced price but with no rebate.  “Many distributors are moving to wrapper solutions whereby customers pay a fixed amount or a fixed percentage amount based on AuM [assets under management] directly to the distributor as well as initial subscription fees into the wrapper.  The distributor would then negotiate directly with the fund company and give rebates to the customer so as to be product neutral in their advice,” says Wood. But Westbø says: “I don’t think people in Europe are ready to pay for advice. And, therefore, this [banning of rebates] will benefit the banks because they offer customers an all-in-one service. This means it would have a strategic impact on specialist boutiques like us that depend on third-party distribution for a large part of our business.” Malmfors says: “From our point of view, the prohibition of rebates would not be a big problem. The earnings of the different components of the Skandia group would just be allocated differently.” Westbø says: “Platforms could also benefit from distributors not being allowed to take commissions. This is because clients could be ready to pay for access to the platform.” Hedström says that in certain statements, the Swedish regulator suggested it could implement a framework similar to the Retail Distribution Review in the UK. “Some two to three years from now we could have the same market structure,” he says. According to Rosengren, the banning of rebates would not have such a dramatic impact on asset managers’ businesses. He claims it would just inspire a change in the business model (see roundtable discussion on p 16-26). Asked how the operating model of the distributors and asset managers would change were rebates to be banned, Holst says: “That is a question that will have to be answered at a later date and by asset managers themselves. Our primary aim is to strengthen consumer protection and ensure all consumers can be sure to receive impartial and sound financial advice.” ©2011 funds europe

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