the aftermath of the share class haggle in uk retail investments, post rdr
TRANSCRIPT
RDR and preferential terms for distributors
The aftermath of the share class haggle
May 2014
Share class proliferation could have been a nightmare
• the UK Retail Distribution Review decreed that distributors should be paid by customers, not providers
• in 2013 distributors spent a lot of time pressing asset managers for preferential terms ….
• not least because the business models of former fund supermarkets were under pressure from loss of cash rebates from fund managers
• everyone expected preferential terms to be implemented by creation of unique share classes for each distributor
• this potential proliferation of share classes would have adverse consequences for all industry participants
If share classes had proliferated…
Impact of share class proliferation Fund managers Less revenue per unit; less control of distribution?
Cost increases; operational risk; back book?
Transfer agency and asset servicing
Scoping additional work & agreeing terms Possibly nugatory IT spend
Platforms Fund manager deal-making (or not?) Adviser communications & investor consent? Pricing pressure vs charges for re-reg/ conversion?
Distributors and advisers
Extra impetus towards restricted fund choice? Ease of moving assets? Customer comms & consent; suitability
Clients Increasing awareness; but confusion and uncertainty Demand for greater transparency and trust Some movement to execution-only venues?
Regulator Drive to understand costs and incentives Assess potential for conflicts of interests Benefits of competition for customers
2013 was a year of speculation about what might happen
But the dog didn’t bite as expected
• many fund managers held the line on pricing, especially for their best products
• if preferential terms were agreed, these were deployed using unit rebates, not unique share classes
• so we didn’t see the amount of share class proliferation originally feared
• it’s been a non-event, but it still puts into stark relief the implications of changing the industry…
• …. from being demand-led to being supply-led
• the aftermath of the share class haggle has left many issues not yet wrestled to the ground
This is not a get-out-of jail card for large parts of the industry
• hard questions remain:
– what does the post-RDR world look like now?
– what should the industry be doing about it?
• we look at the impacts on four key layers:
– fund managers, who face nine challenges
– platforms, confronted by seven threats
– advisers, who could do better at orchestrating demand
– clients, who have needs they are struggling to meet
• we explore four scenarios of the future…
• and set out next steps for the retail investments industry
Nine challenges for fund managers
Recycled inflows
“Only around half of the fund operators actually took money in. These operators reported net retail inflows of £23bn, offset by outflows of £8.8bn” IMA, Asset Management Survey 2012 -13
Legacy books
Rich pricing on legacy funds Challenge to justify continued high charges
Profitless variety 185 “strategically useful” funds in a universe of 70,000 funds
Active vs passive
Inexorable rise of passive puts pressure on active propositions to demonstrate value for money
Lack of pricing power
Middle-ranking, undifferentiated fund managers facing weak & diminishing pricing power
Offer to investors
What is the proposition and how is its value communicated? How can fund managers be sure they are treating customers fairly?
How to get product to market
Commission no longer available as a marketing option. Which combination of the 4P’s will have the most impact?
A reduced take
Intermediaries such as platforms and advisers have very strong incentives to reduce the take available to fund managers
Making sense of costs
Growing pressure to unbundle underlying costs Needs agreed standards, or action by the regulator
Seven threats to platforms Commoditisation of platform services
No significant opportunity for distinctive competitive advantage other than dependable and resilient servicing
Increased cost awareness
Portfolio admin costs have increased significantly Cost minimisation the new imperative for investors
Non-scaleable costs
Economies of scale difficult to realise Most processes remain manually intensive
Unsustainable cost of sales
Race to attract assets leads to expensive adviser service standards, and unaffordable variety in processes and systems
Price reductions Drive down to 10bps charge level threatens sustainability Unclear business rationales
Why did we set up a platform in the first place? Is our business model sustainable?
Service fees replace ad valorem charge
Fixed service fees threaten revenue models which rely on cross-subsidy from larger investors
Distributors and advisers
• how to demonstrate sustained suitability?
• scope for increasingly segmented offerings
– holistic financial planning , for those who can afford it
– D2C/ execution-only, for those who can’t
– occupational = quasi-retail?
– scaleable volume advice propositions
• how to orchestrate demand and drive better value?
• more layers of intermediation (and expense)?
– DFM/ restricted propositions = quasi-institutional?
– business intelligence providers
– adviser software providers = gatekeepers
Clients have unmet needs • they want to deal with organisations
– they can trust
– which provide a dependable return
– at a cost they perceive as reasonable
– when compared with the value provided
• …… and have in mind relevant experiences from other industries:
– Ryanair, Aldi, Amazon, John Lewis
• strengthening contest for influence over the customer
• and do we know what we mean by “fiduciary”?
Some regulatory imponderables remain
• what’s involved in rebalancing from:
– a rules-based/ enforcement regime, towards
– “getting the market to work better”?
• what exactly are the practical implications of “behavioural economics”?
• in what circumstances will “caveat emptor” apply?
• does pricing convergence confirm the existence of competition (or not)?
• how will “conflicts of interest” be interpreted?
• does a duty of “candour” apply?
• what does “transparency” mean in practice?
Two main drivers will influence the transformation of UK retail investments
1. The extent to which customer demand is successfully aggregated, putting pressure on the upstream value chain
2. The extent to which technology is fully exploited, increasing customer access and slashing end-to-end costs
Two scenarios for continued supplier dominance
Classic British fudge • lots of talk, but little real change delivered
• incumbents still milk the current model
• industry remains expensive and inefficient in comparison with other sectors
Jurassic Park IV • a battle of the dinosaurs, to the last man standing
• competition greatly intensified through distributor pressure, reducing the take available for other parts of the value chain
• but incompetent IT and clunky processes bring down the weaker, sub-scale players
• delivery of value to the customer is still impaired
Two scenarios for technology transformation
Enhanced value extraction • IT-enabled change reduces costs, transforms distribution
effectiveness and mitigates risk
• but increasingly dominant suppliers extract the value to enrich themselves, and do not share the benefits with the customer…
• … for whom outcomes do not dramatically improve
Retail Investment Review-max • Amazon-like disintermediation
• endless interrogation of supply chain costs by informed critics
• radical price reduction and frictionless transacting
• exposure of well-rewarded talent, vigorous competition, instant availability
• niche players and new entrants can succeed
Faites vos jeux – place your bets
Option A Option B Option C
Fund managers
Focus on specialist talent provision
Aim for cost leadership
Integrate with distribution
Transfer agency and asset servicing
Promote industry collaboration to capture benefits of electronic trading
Monetise data Enter platform domain/ de-duplicate adviser CRM
Platforms Move towards fund management
Build out towards distribution
Go for economies of scale
Distributors and advisers
Holistic financial planning
Adviser software houses command more of the value chain
Automated services to mass affluent
What the industry should be doing
• do something!
• be outward-looking, get educated, keep informed
• avoid group-think; involve all corporate functions
• review & strengthen what you are good at
• divest or outsource what you’re not going to be good at
• search for and secure pricing power
• identify, analyse and reduce costs: – cull funds
– simplify the business
– pay less for externally-procured services
• appraise technology carefully
• have a Plan B
A note on methods
Research was conducted by Andrew Lloyd, David DAN Norman and David Taylor during Autumn 2013.
Structured discussions were held with 17 people from 15 organisations, including platforms, global transfer agents and broker/ dealers, UK distributors, global and UK-focused investment managers, a global performance analytics provider and industry commentators.
Interviewees held senior roles within IT, business development, proposition or operations functions, or had business unit P&L responsibility.
The organisations involved had aggregate assets under management of some GBP4trn.
In addition the research drew upon data sources and research reports in the public domain, including those published by industry bodies such as:
– the Investment Management Association, in particular the IMA’s 2012 – 2013 Asset Management Survey, and
– the Wealth Management Association
Andrew Lloyd E: [email protected] M: 07841 602 613 David DAN Norman E: [email protected] M: 07789 396 836 David Taylor E: [email protected] M: 07768 077 796