Just as the music and publishing industries were disrupted by a digital revolution, so is the funds business undergoing a technological shift. Online channels give customers cheap, direct access to funds, allowing them to bypass traditional distributors such as financial advisers, banks and insurers.
The digital shift already seems to be forcing down revenues for fund companies, not least because of the rising popularity of passive funds with low fees, which add to pressure on profit margins across the industry.
It is a challenging time for the funds industry – and there are further threats on the horizon. The giant web firms such as Google, Facebook and Amazon have yet to make a meaningful foray into the funds industry, but how much longer before they do? Perhaps fund companies should look to Africa, and the rise of mobile payment services such as M-Pesa, or to China, and the success of a money market fund launched by a unit of Alibaba, to guess what could be next.
Funds Europe sought to predict the future of global fund distribution by surveying our readers, underscoring the data with targeted interviews with a panel of experts on the funds industry. The results are as follows.
Evolution
Our respondents broadly agreed with the claim that distribution is changing.
The majority (57%) agreed with the statement that “online, direct-to-consumer distribution channels such as fund platforms will take over from traditional channels (banks, independent financial advisers) as the main way asset managers raise assets under management”.
Only a fifth disagreed – including a small number (3%) who strongly disagreed – while nearly a quarter were neutral.
A similar result was obtained when respondents were asked if “passive funds, such as index funds and exchange-traded funds (ETFs), will take over from actively managed funds as the core investment product for mass retail customers”. The majority thought passive funds would take over, compared with only 15% who disagreed.
Respondents who agreed with the question were asked to say how soon they expected the predicted shift to take place; the most popular answer was “within two to five years”.
There was less of a consensus, however, when respondents were asked to consider if passive funds would take over from actively managed funds as the core investment product for sophisticated investors, defined as institutions, wealth managers and high-net-worth individuals.
Only 30% of respondents said they believed this, while 31% were neutral on the question and 39% disagreed with it.
It seems that many of our respondents think sophisticated investors need sophisticated funds. If so, this finding could signal a shift in marketing strategies in which active fund managers increasingly focus on wealthier investors, leaving the mass retail market to be swallowed up by the passive providers.
Will the rise of ETFs spell the end of active management? Not necessarily, says Jon ‘JB’ Beckett, UK director and lead, Association of Professional Fund Investors (see box).
Actively managed ETFs may become a more important product type in future, he argues.
Machine learning
Another issue that divided our respondents was robo-advisers, by which we mean algorithm-based services, typically online, which design investment portfolios automatically.
There is much enthusiasm for these services, which provide investment advice at a fraction of the cost of a human adviser.
We asked our respondents if they thought robo-advisers would become the main distribution channel for raising assets from the mass retail market. A total of 42% agreed or strongly agreed while 28% disagreed or strongly disagreed.
Respondents who agreed with the question were asked to say how soon they expected the predicted shift to take place; the most popular answer was “within five and ten years”.
The results indicate that our respondents are aware of the benefits of robo-advice, but unsure yet if it will become an industry standard. 
The uncertainty may reflect a lack of experience with these systems or a belief that they are only suitable for certain types of customer, for instance, mass retail clients but not high-net-worth ones.
Richard Garland, managing director, global advisor, Investec Asset Management argues that robo-advisers are not appropriate for wealthy clients, who tend to want personalised advice (see box). This kind of view is widespread in the industry.
For the next part of the report, click here.
©2017 funds europe
