Industries are permanently evolving, but incremental changes are hardly noticed. Sometimes however, industrial sectors undergo radical changes, where the process of incremental evolution is significantly disrupted by outside economic forces, such as the global economic crisis we are witnessing today, while also facing a deadly virus that is impacting the standard operating procedures of every industry.
The impact of the first few days of March 2020 will be long lasting, and the investment management ecosystem now has to adjust to the new normal. There is a growing recognition that this time around, the recovery will demand more change by market participants. Embracing change could create a competitive advantage.
What has changed ?
Even before this crisis, asset managers were facing new challenges, particularly as a result of new regulations. Furthermore, the world of alternative investments is likely to expand and diversify in its offering, attracting more capital into emerging / “non-traditional” strategies. Most importantly, with more offerings on the market, more investment firms and family offices being launched, and stricter geographic regulations and checks and balances, getting to the investors, capturing their attention and gaining their trust has become even more important and challenging.
Moreover, the fund and asset management business has never been more competitive. We’ve seen a plethora of new entrants, be they ex-hedge fund managers, bankers or money managers, launching new products and strategies and competing for a share of investable capital.
Over the last years we have witnessed incumbent firms respond and adapt by launching new products on top of legacy structures and processes, with expertise often limited to a small number of people within the firm. In a bull market, such additional expense can be absorbed, but in today’s cost-conscious world where such products are becoming mainstream offerings, the infrastructure to support them must also move into the core operating environment of the manager.
The battle to reach customers In the past, asset managers and fund managers sold to distinct client bases. Today, they are both addressing the same groups — institutional investors, high net worth individuals and retail investors — and, therefore, are fighting for the same attention span and capital allocation. This challenge is not straightforward, and most firms have little experience of marketing beyond their core client base.
Globalisation too presents its own opportunities and challenges, as fund firms seek new markets with which to expand the manufacturing of funds, and to develop new markets in which to distribute.
The funds world, from the outside, may look like a complex one — with different partners and participants including a mix of banks, private banks, insurance companies, wealth advisors, and even asset managers themselves each playing their role in serving the investor relationship and facilitating the transactional distribution of funds.
The EU — despite having a harmonised fund structure and a reasonably aligned regulatory regime in the form of UCITS and the Alternative Investment Fund Managers Directive (AIFMD) — has a number of different distribution channels across its member states. Investors in many European countries will typically acquire units in funds via a bank. On the Scandinavian and Swiss markets for example, funds are primarily distributed through private banking networks whereas the majority of funds sold in the UK, Germany and the Netherlands are done so via either platforms or Independent Financial Advisors (IFAs). Efforts to streamline the cross-border distribution model are being pursued by the European Commission through the Capital Markets Union (CMU) programme, but, for now, Brexit seems to have stalled its progress.
Further afield, the distribution process in Asia-Pacific similarly lacks uniformity. Banks broadly dominate retail fund distribution in Singapore and Hong Kong. Harmonisation of funds’ regimes in Asia is making good progress but there are three customised initiatives in motion (the Asia Region Funds Passport (ARFP); the ASEAN Collective Investment Scheme (ASEAN CIS) and Mutual Recognition of Funds (MRF) between Hong Kong and China). Such fragmentation of the distribution ecosystem creates challenges and complexity.
As a result, distribution is becoming just as critical a factor as performance to determining a fund’s success, and must be addressed with renewed vigour.
The opportunity In recent years we have seen a gradual shift towards greater client-centricity. In the UK IFAs, for example, are no longer remunerated by managers for selling their products, but paid by clients for providing impartial advice. Cost pressures have also prompted the industry to identify more efficient ways of targeting investors.
A new generation of investors requires user-friendly and customised investment solutions, and digital investing solutions are emerging to answer this demand. Existing investors, familiar with digital solutions as a result of their use of computers, tablets and mobile phones, expect new tools that guide them in their investment decisions. The bar for user experience and service access has been raised.
By now it is clear that the future of distribution is digital, in line with the transformations we see across the whole financial services industry. The challenge is how to digitise the whole transaction chain, which today is so fragmented, costly and inefficient. Ultimately, digitisation and automation will permit overheads to be reduced creating sustainability in an industry that is looking like a target for disintermediation.
In our view the current design of traditional funds and investment vehicles is too cumbersome, and not fit for the digital world that is being created.
Accessing innovative fund distribution Digital fund distribution is not only based on technology. The key to extending a firm’s distribution is its product structuring and internal capabilities. Funds managers are faced with a plethora of options when considering types of investment vehicles. Factors considered are usually regulatory framework, investment strategy, investor geography and appeal, the network of service providers, and, perhaps most importantly, the resources needed and set-up cost.
As the livelihood of a fund largely depends on its ability to attract capital, the investment vehicle needs to be set up to meet investor standards. While no two investors have the same requirements, the objective is to employ commonly used structures and processes that are easily understood by them.
BONART’S Business Our team mixes funds distribution and digital expertise across various industries (from banking to e-commerce and fin-tech). We are inspired by digital experiences from our daily life.
We believe it is time to challenge the ways investors and asset managers work together. We serve some of the leading banks and asset managers in Switzerland, UK and Israel, for whom we create compliant investible vehicles for their exact purpose and needs.