Regulation will push advisers to offer passive, says Moody’s

Fears of mis-selling products will cause sales patterns of funds to change, driving more clients of advisers into passive funds, a report says.

This is because advisers will step back from offering complex products to retail investors owing to regulatory trends that require advisers to know their clients better and offer products that are in clients’ best interests.

Regulators around the world have pushed for greater transparency on costs and more disclosure on fees and potential conflicts of interests, says Stephen Tu, the senior analyst at Moody’s who forecasts the change in a report.

He highlights the US, where the Department of Labor has adopted the fiduciary rule that Tu says is likely to accelerate the shift to passive and cause sales behaviour to change.

“Under the new regulation, advisers are expected to ensure investments are in the best interests of their clients, rather than merely suitable for them. In practice, it will become more difficult for advisers to place their clients into higher-cost and more complex investment products.

“Selling low-fee index products, on the other hand, will eliminate many apparent conflicts of interests and minimise fiduciary risk.”

Ensuring funds reach their correct ‘target market’ is another possible regulatory driver in Europe. Target market forms part of the Markets in Financial Instruments Directive II.

Persistent underperformance of traditional active management is also a driver for passive, notes Tu, and he points out that  consistent net outflows globally from traditional active funds into lower-fee passive products are “gathering steam” and will rise well above the level of one-third in the US.

Moody’s says it considers overcapacity in active management to be a primary cause of investment underperformance.

©2016 funds europe

HAVE YOU READ?

THOUGHT LEADERSHIP

The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
FIND OUT MORE
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…
DOWNLOAD NOW

CLOUD DATA PLATFORMS

Luxembourg is one of the world’s premiere centres for cross-border distribution of investment funds. Read our special regional coverage, coinciding with the annual ALFI European Asset Management Conference.
READ MORE

PRIVATE MARKETS FUND ADMIN REPORT

Private_Markets_Fund_Admin_Report

LATEST PODCAST