Asset management, in the midst of technology, new rules and millennials

Asset managers need to refine product propositions and distribution models, while distributors need to propose new engagement models. All details in the research of Caceis and PwC Luxembourg

Retail fund distribution is in the midst of major changes. According to Caceis and PwC Luxembourg report entitled “Reshaping retail fund distribution – Winning strategies and tactics in a disrupted environment”, asset managers need to refine product propositions and distribution models, while distributors need to propose new engagement models.

Fund distribution is at a turning point
The latest regulatory agenda, a serious change in the investor base (Millennials) and recent technological developments: these are the three disrupting factors with which players will have to contend going forward.
Over the past few years, the impact of these disruptions on the industry has intensified and now requires appropriate actions.
This industry changed face. “Opportunities abound for asset management firms and distributors, but they must understand how to make the most of them – said Olivier Carré, Partner, Regulatory & Compliance Advisory Services Leader at PwC Luxembourg – New pricing models, strong client-centric solutions, and increasing integration of social, mobile, analytics and cloud, a.k.a. SMAC technologies, will be essential for those who want to succeed in the new fund distribution landscape”.

Photography industry
The industry has bounced back after navigating the turbulent waters of the last few years. Total assets under management (AuM) in Europe reached an estimated €19.3 trillion at the end of 2014; institutional clients represent the largest client category, accounting for 74% of total AuM, while direct investment of retail investors account for 26%.
“For the last decade, the majority of products distributed to retail investors were actively managed “plain vanilla funds”, but this trend is changing – there is written in the study – Passive investments now capture a large share of fund market growth and they are set to maintain this pace. Global passive investments more than quadrupled from 2004 to 2013 reaching $9.2 trillion in 2013 with a 26.7% compound annual growth rate (CAGR) increase. Within the passive sphere, ETFs products and index funds are gathering momentum”.

Two main regulations
Now the eyes go on the regulatory actions taken in order to avoid conflict of interest and increase transparency in the system, and consequently improve consumer protection within the retail fund landscape. Two are the main regulations: RDR, adopted by the UK in January 2013 and emulated by other countries such as Australia, Singapore, South Africa, and the Netherlands, and MiFID II, which will come into force in the EU in 2017.

Mobile technology as a new distribution channel: robo-advisors are the future?
“D2C and D2B platforms come in many guises and under different names, but they fall into two main categories: fund supermarkets and wraps platforms. Essentially, both are online marketplaces that allow users to buy, sell and store investments in one virtual place, in addition to providing advice and portfolio management”, says the study.
When it comes to financial advice, technology developments have also enabled the growth of automated advisory services. Clients can now navigate the fund industry by using new technologies that combine algorithms and user-friendly interfaces to allocate money. Hence, the advisory business is ripe for revolution.
In the last few years have become increasingly popular robo-advice services that, through sophisticated algorithms, help consumers to build and manage investment portfolios based on their age, risk aversion, income requirements, investment timeframe, income, savings and assets.
The robo-advisor sets the asset allocation into a range of funds. If something changes, for example, a particular event impacts the market or a sector, the algorithm changes its chosen funds accordingly and the system automatically updates the client’s asset allocation. In addition, with robo-advisors, even retail investors can access these services at reasonable price.
According to a study by Corporate Insight, on a global basis, robo-advisors directly managed about $19billion as of December 2014, and this figure is set to grow since virtual advisors are providing personalised portfolio allocation, tax aware portfolio design, smart rebalancing to maintain a target risk and 24/7 access with lower fees than other types of advisors.

Social, mobile and Millennials
A new generation of investors stands apart from the crowd. It’s the Generation Y. The latter, also known as “Millennials” are radically changing client demographics, behaviours and investment expectations. At present, they represent 25% of the workforce in the US and account for over half of the population in India. By 2020, Millennials and Generation X will represent 60% of the global workforce.
There is, then, the social media. And social media data is becoming important for fund distribution. “This channel is turning into the favourite tool for delivering opinions on the current product offering and customers’ experience, so mining data from this source would bring critical insight about customers’expectations and consequently could help with product development initiatives”, says the research.

Challenges
According to the research, with bank advisors moving upmarket and the low-end mass market being orphaned by advisors or investors not keen to pay for advice, an “advice gap” is likely to develop. In addition, the overlap between products and solutions offered respectively by asset managers and distributors is forming. Financial advisors and distributors will need to fill this gap by enhancing their advice models by adopting new technology and mandate-based fees, developing own asset management capabilities or specialising in determined products or services, such as long-term saving solutions.