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Research Reports » Clearstream Jan 2020

What the experts say

A panel of experts was asked to comment on key questions from the survey.

How will the market for third-party fund distribution develop over the coming three years in your region?
Do you anticipate consolidation of fund platforms?
How are the demands of asset manager, distributor and investor changing in terms of what they demand from a fund platform?

NEIL WISE, GLOBAL HEAD OF SALES, INVESTMENT FUND SERVICES, CLEARSTREAM

We have seen more and more consolidation in the funds industry over the last ten years. Indeed, out of the top 500 asset managers in 2008, just over 250 are in existence as standalone operations today. Going forward to 2025, this is expected to decrease further by almost 20%. The driver for this consolidation is primarily economies of scale, as well as fee or margin pressure.

This pressure is likely to continue going forward, affecting all aspects of the industry – asset managers, asset servicers, distributors and infrastructure providers. The solution to this will be more automation and streamlining of processes, combined with the provision of value-added services and investment in more technology.

The industry expects technology to provide savings of 2% to 3% per annum over the next few years to compensate for margin compression.

The distribution platforms are increasingly under pressure to deliver full-service solutions, as well as to provide an extensive or global footprint allowing uniform services across all key markets. The efficiencies this will deliver across markets is one of the key demands of asset managers and asset servicers.

As part of the drive for more economies, we are seeing a push for end-to-end solutions reducing the friction in the marketplace. Investment in streamlining operations and technology is likely to be key to success going forward.

Large cross-border fund processing volumes, a broad product choice and wide geographical coverage of Vestima allows Clearstream to offer a very competitive pricing structure for an end-to-end solution in the fund distribution segment.


MARC-ANDRÉ BECHET, DEPUTY DIRECTOR GENERAL OF THE ASSOCIATION OF THE LUXEMBOURG FUND INDUSTRY (ALFI)

Third-party fund distribution is incredibly complex. It also differs substantially from jurisdiction to jurisdiction, including within the EU itself, so that there isn’t a one-size-fits-all strategy for fund distributors. There are huge differences by category of investors, between fund products and geographies. MiFID II, and similar initiatives such as RDR in the UK, have definitely impacted third-party fund distribution, leading to a split between independent distributors and tied agents.

In reaction to these new regulatory requirements, distributors and asset managers have adopted a more targeted strategy, with a review of their existing fund range, a reduction in the number of funds on offer and ongoing monitoring of where products are placed and to whom, as required by MiFID II with the concept of “target” markets. In parallel, asset managers, as well as third-party fund platforms, have responded to this challenge by designing solutions which facilitate direct fund distribution. This translates into the creation of B2B and B2C platforms, fund supermarkets, packaging fund distribution into investment advisory services or robo-advice solutions.

In terms of disruption, we expect the rise of fintech to continue to revolutionise the fund industry. That said, it is important not to be misled by the term “disruption”; while fintech will certainly shake up the status quo of fund distribution, all signs point to this being a wholly positive paradigm shift. Cloud-based solutions, machine learning, artificial intelligence, blockchain/ DLT, are all undergoing an exciting emergence and will no doubt bring efficiencies never before seen by the industry. A new generation of investors is also increasingly looking for digital solutions, with instant access to fund information. Fund distribution capabilities through smartphones, tablets and web-based solutions are a must when servicing these investors.

Fund platforms will invariably play a central role in the expansion of the industry’s distribution strategy in the next few years. As it stands, there is a great deal of complexity within distribution channels; technical order routing platforms, country-specific direct and indirect agents, and differing investor identification processes all compound the incomprehensibility of the distribution process. Fund platforms are becoming increasingly popular with certain market segments, as the distribution platforms they offer allow a single account to invest into multiple investment funds (fund supermarkets). We do not exclude the possibility that new actors, such as online shopping platforms, will start distributing funds, similar to what has already happened in China, where Alipay is distributing money market funds. Some asset managers are considering setting up JVs with tech firms, with a view to rethinking their distribution technology tools.

Luxembourg service providers provide all types of solutions to these issues, supporting distribution channels and distributors globally. Market experts facilitate truly global distribution, targeting retail and institutional investors alike throughout the world. As a central hub for cross-border distribution to more than 70 countries, Luxembourg concentrates specialist knowledge of distributor due diligence, both initial and ongoing. All of this adds to our bullish outlook for the fund distribution industry over the next few years and will ensure third-party fund distribution will continue to thrive in the coming decade.


SÉBASTIEN CHAKER, EXECUTIVE DIRECTOR, UBS FONDCENTER, ASIA-PACIFIC

Third-party fund distribution has been embedded in most Asian countries for many years and accounts for over 75% of retail fund distribution in markets like Hong Kong, Singapore and Taiwan. Fund distribution will continue to grow in this region in the next few years, driven by regional wealth creation, the growth of private retirement plans and the advent of new digital distribution solutions. In addition, new countries previously closed to cross-border funds distribution, such as Thailand, are gradually opening up. This will further increase third-party funds distribution in the region.

The consolidation of wholesale fund platforms started several years ago. Today, there are less than a handful of global fund platforms operating alongside smaller local or regional platforms. We believe this consolidation will continue as fund distribution continues to grow in complexity. This, as a result, requires fund platforms to significantly increase IT and technology budget to deliver services that help customers automate, comply with regulations and remain competitive. In Asia, specifically, increasing regulatory requirements such as product due diligence, fund suitability and fee transparency have driven fund distribution costs up and forced distributors and fund providers to look for tech-based solutions to mitigate compliance risk and reduce operational costs. Only fund platforms with sufficient scale and expertise will be able to sustain these large investments to develop new value-added services required to stay relevant in this space.

Our mission is to make fund distribution more efficient, faster and cheaper and allow our customers to focus on their core activities (i.e. investments and advice). We provide fund distributors and fund providers with a marketplace which streamlines communication and interactions across the entire fund distribution spectrum – by integrating external service providers and developing digital solutions that help our customers reduce costs, scale their business and ease their regulatory burden.


MARGARET HARWOOD-JONES, MANAGING DIRECTOR, GLOBAL HEAD OF SECURITIES SERVICES, STANDARD CHARTERED BANK

Utilisation of fund platforms has grown in Asia over the past few years and we expect this trend to continue, with platforms remaining a priority as a distribution channel within the region. It is noteworthy that fund platforms have been adopted in different ways by investors, market players and market infrastructure entities in different jurisdictions.

In Indonesia, S-INVEST (launched by the local CSD) continues to grow as an end-to-end platform for the whole market, supporting fund orders, order settlement, client reporting and investor record-keeping. In Thailand, Fund Connect has slowly, but gradually, started acquiring space, with asset managers adopting this into their ecosystems. In September 2019, Standard Chartered and Clearstream announced a partnership, along with the Stock Exchange of Thailand (SET), to facilitate cross-border funds transactions, thereby encouraging international fund flows into the funds market in Thailand.

At the same time, we are also seeing growth in proprietary fund platforms. A wider range of third-party funds are being added to these proprietary platforms, thereby providing greater choice to existing clients. Such additions are mostly funds from premium and marquee asset managers.

Last year, Standard Chartered also partnered with a key strategic asset manager, supporting its initiative to establish an online fund platform offering both proprietary and third-party funds for its customers.

So how are the demands of asset manager, distributor and investor changing in terms of what they demand from a fund platform? The asset management industry is growing in Asia and both the product offering, and channels through which these products are offered, are becoming more sophisticated. Technology and platforms have started playing a huge part in this transformation. Use of new technologies, including distributed ledger technology, artificial intelligence and data analytics, is improving processes and enabling better data insight. As a result, we see consolidation of such platforms, starting with high-profile acquisitions of distribution platforms in the wider industry (e.g. Allfunds Bank, MFEX platform, Axeltis, Swisscanto Funds Centre, etc).

Asset managers are also ramping up their innovation efforts to distribute funds directly to investors. Some of these are assessing whether to get rid of their fund structures, enabling investors to customise their own portfolios and choose their own assets to invest in. In addition, venture funds are also creating their own platforms to distribute their investments, which are primarily channelled into technology start-ups.

With the growth of alternatives – including infrastructure, private equity and real estate – sophisticated investors expect fund platforms to make a wider variety of these fund types available from across a wide range of promoters and geographies.


STEWART ALDCROFT MANAGING DIRECTOR, CITI MARKETS & SECURITIES SERVICES, SENIOR ADVISOR, ASIAN FUND MANAGEMENT INDUSTRY

Third-party fund distribution in the key Asian markets for UCITS products in Asia (i.e. Hong Kong, Singapore and Taiwan), is dominated by banks. These offer wealth management platforms for their customers that provide access to UCITS, as well as other mutual fund products that are authorised for distribution in the local markets by the regulators. Unless there is a change to the current basis of commissions being paid to distributors in Asia, both as front-end as well as trail commissions, I would not expect to see any significant change to the dominance of the banks as the primary outlet for mutual fund distribution.

So, can we anticipate consolidation of fund platforms? Banks operate their own fund platforms – and thus are unlikely to combine with their competitors.

That said, it is essential here to define what we mean by a fund platform. There are plans to enable the introduction of online fund distribution in Asia, but this could take some time to gain sufficient volume without there being external influence such as regulatory change.

Although online has been very successful in China, over 90% of funds sold online have been money market type and thus have not required much detailed explanation.

There are many new entrants looking to join the field. They may choose to combine with the new virtual banks setting up in Hong Kong and Singapore. But these will take a few years to become established and to grow. These do not yet represent a significant business opportunity.

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