Why the distribution space will evolve and the sub-advisory model will become a staple in the industry Furio Pietribiasi, CEO of Mediolanum International Funds Limited.
European fund managers face several challenges in today’s world – soaring inflation, rising interest rates, and a looming recession alongside increasing regulatory pressures – making their ability to retain existing clients difficult. As a result of these pressures, the historical squeeze on costs, fees, and margins, continues unaltered – and even exacerbated – in the distribution chain.
With more transparent cost disclosure introduced by regulators, the value for money (VFM) concept for investors takes on special relevance and moves centre stage. I should note that Mediolanum supports the concept of value for money. This is a crucial topic on the regulatory agenda both in the UK and the European Union, where regulators and governments have challenged financial services firms to demonstrate how they are delivering value to clients.
In the UK, this has led to the introduction of consumer duty, fund value assessment reports, and the cost transparency initiative. In the EU, value for money is set to become a key concept within the retail strategy, which is expected to be delivered by the European Commission early next year.
Value for money can be grouped into three categories: costs and charges, output – defined as risk and return with a focus on the long-term – and quality and service, which refers to features and benefits desired by investors, which may include issues such as the quality of governance or the sustainability of an investment approach.
The reality is that the concept of value for money, although welcome, will require a significant shift in the operations of asset management companies in order to meet the regulatory requirements. The increasing focus on consumer outcomes will bring fees and performance to the forefront, which in the current market environment will be difficult for many.
“The increasing focus on consumer outcomes will bring fees and performance to the forefront…”
It’s in this environment, however, I believe the sub-advisory model will perform exceptionally well not only in terms of cost but also in terms of performance and access to talent. Access to talent is important because it allows you to quickly adapt to new market conditions by diversifying or changing to different investment strategies and processes.
Recent data reinforces our view. Sub-advised fund assets in Europe are on course to record an annualised growth rate of 10.4% and reach €3.2 trillion by 2030. This growing trend can lead to more efficient products overall, offering asset managers and distributors more sustainable business through the different market cycles.
I, therefore, predict that sub-advisory assets will continue to grow, primarily due to an increased focus on fee compression and the need for sponsors to outsource specific investment strategies to the best specialists, which can navigate the worse and most unique market conditions.
By leveraging the sub-advisory model, asset managers can maintain better margins while taking on more responsibility over investment strategies, as it enables them to change a fund manager if performances do not meet expectations.
The ongoing focus on cost transparency will inevitably lead to more consolidation in the industry. The resulting M&As will give rise to individuals and teams who are not comfortable with the new structure they find themselves in to move on to set up their own businesses. In other words, new boutique asset managers will be set up by these entrepreneurs. The existence and, indeed, increase of boutique asset managers is important in the context of value for money because boutique managers have the propensity to outperform the broader market primarily due to an alignment of interest. The sub-advisory model would allow managers to leverage this outperformance by increasing their exposure to boutique managers.
All of this is to say value for money as a concept will significantly impact how asset management distribution works, and I expect to see an evolution in the distribution space as a result, with the sub-advisory model quickly becoming a staple in the industry.
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