A consensus is developing about the outcome for Europe's funds industry in light of retrocession bans, says Jean-Daniel Zandona, director, sales management & fund solutions, at Credit Suisse.
The long-awaited cross-Europe ban on distribution fees has become even more real with the adoption of a complete ban on fees by the Dutch Parliament in December last year. The ban encompasses portfolio management, advice, and also execution-only clients.
In that sense, the Dutch regulator goes much further than the initial MiFID requirements, following a “gentlemen’s agreement” between the six largest distributors (covering more than 90% of the domestic distribution market), not to accept retrocessions any longer.
The consequences of such a ban will greatly vary depending on the distribution structure of each domestic market, whether driven by IFAs, such as in the UK, or by the banks, such as in Spain, France, Italy, or in the case of the Netherlands and Nordics, where insurance companies also play a key role.
Although Europe’s MiFID and the UK’s Retail Distribution Review (RDR) are somehow different, their impacts have been largely debated and are under scrutiny at the European level.
A consensus is emerging about the outcome that says transparency for end investors will increase by creating a level playing field for managers. However, the mass retail market might suffer restricted access to advice, with some advisers/banks applying minimum investable assets to get advice, or moving sub-scale investors to execution-only mandates where possible.
In addition, large banks at the forefront of retail distribution in many European markets keep focusing on risks and tend to privilege well-established managers (with large asset bases and proven track records) when selecting investment products for their retail clients, which raises the barrier to entry for smaller managers. In-house “one-stop-shop” investment services also favor banks, for which pure investment advice (whose remuneration is banned) is just a component of a more diverse client relationship.
In terms of product manufacturing, low-cost and index funds are emerging as more cost-effective investment solutions, providing a diversified exposure to more cost-driven investors.
Apart from these scenarios, there is still little visibility on how advisers and other asset allocators will compensate the loss of earnings, by designing new operations and fee models. Indeed, banning rebates will obviously lead to more, or less, innovative workarounds. Most managers impacted have already introduced clean share classes bearing no distribution commissions and have revamped their distribution agreements.
On the advisory side, fund selectors are indeed entitled to charge a service fee directly to the end retail investor… however, the latter seems to believe such advice had always been free.
Interestingly, we see advisers also exploring alternative routes: profiling investors to then pool target fund managers by strategy/geography/sector in an umbrella fund-of-funds wrapper is one of these options. In this scenario, each sub-fund corresponds to an investor profile (aggressive, balanced, defensive, for example) and invests in various pools (European equities, Asian bonds, etc). Each pool invests in underlying funds corresponding to its strategy.
To replace its “advisory” fee, banks acting as advisers to retail investors may consider moving to a fund of funds manager role, where charging management fees is still authorised.
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