The document also states: “Over the last years, investment flows into Ucits funds have shown a high degree of volatility. Some market data suggests that redemption rates are structurally much higher in Europe than in the USA. The industry is conscious of the potential impact of such volatility on end investors and for that reason intends to engage in a strategic review of how its products are being distributed, with a particular focus on investors.”
The organisation should probably add to that strategic review with the words: “By whom products are being distributed.”
By and large, funds are distributed by bank-branch networks in Europe (outside the UK) whereas funds, to a larger extent, are distributed by independent advisors in the US. A further separation of production and distribution in the industry is probably a trend which will not reverse. It is therefore of essence that distributors truly act as the agent of the investor.
To get there I think that the section of the industry we in this column gather under the fund selection label should take an even more prominent position in the effort to improve distribution and how funds
are sold to investors. As gatekeepers, notably employed by distributors, they hold the power of sorting the wheat from the chaff. They should also take on the responsibility of ensuring that the right fund is sold to the right investor at the right time, ie, putting more work into the suitability of certain funds for certain investors.
Most of these fund selection groups and individuals are great at categorising funds to ensure that red apples are compared with red apples in their evaluations. Equal emphasis should be put at categorising funds according to ‘suitability’ for certain investors. This would be in line with the ‘appropriateness requirement’ under MiFID. It should be possible for distributors to link a client’s risk profile to a fund’s suitability category so that certain funds do not even show up on the advisor’s screen for certain type of investors.
The Efama document further says the industry will be “pushing for better financial education amongst retail and institutional investors”. Better understanding of financial issues is, of course, great, but I do not think we can rely on that to sort out the problem. That would simply put too much responsibility on individual investors who have so many other things on their minds in their everyday life. They will still need to be guided by professional advisors and professional advisors who are remunerated in such a way that they have the investors best in mind.
A question for you: Should a suitability categorisation of funds be part of the solution to improve distribution of funds in Europe?
Finally, I’m also keen to hear your views on last month’s questions, so I’ll post them again:
• Is there a need for more (independent/standalone) fund research?
• What would you look for from a fund research firm? For example, would it be research notes that provide qualitative assessments and express a balanced view on specific funds/managers? Or research notes that provide qualitative assessments and express a balanced view on individual fund companies? Or what about research notes that provide a strategic take and express a balanced view on categories and list buy and sell candidates among the funds in that category?
Please visit www.fundselection.org/blog as I look forward to reading your thoughts on these topics.
Niklas Tell is a partner at Tell Media Group AB
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