FUND SELECTION: will independent advice kill active managers?

If distributors and advisors to a larger extent use ETFs and other passive alternatives, fund groups also need to ask how to position their traditional, active long-only product. Niklas Tell comments…

For a moment I would like you to look ahead to a future where distributors and advisors are really independent from fund groups and where they do not accept commissions but instead get paid by the so called ‘end customer’. What products and what services do fund groups offer to satisfy the needs of such an audience? If I extrapolate the current debate it seems likely that everyone will focus on asset allocation and that everyone will use ETFs or other passive alternatives to fill their model portfolios with content rather than using traditional long-only active managers.

We highlighted distribution issues when we covered the Fund Forum this past summer. In the August issue of Funds Europe, we referred to Jean-Baptiste de Franssu, the CEO for Invesco Europe and president of Efama, who said that the two most important issues for the European fund industry going forward are distribution and pensions. On distribution he concluded that there are major problems which need to be solved as this is where product meets client. Mark Tennant was even more direct when he summarised the Monday sessions at the Fund Forum with the following words: if banks and advisors are now the agent of the client – who is our distributor?

Fund groups need not only ask who their distributors are. If distributors and advisors to a larger extent use ETFs and other passive alternatives, fund groups also need to ask how to position their traditional, active long-only products. How can fund companies make these funds an attractive proposition if they are not allowed to pay distributors good money to promote them? Also, fund selectors need to ask themselves what their future role should be if there is no demand for active managers – not even the best ones. We have discussed the issue of fund selection versus asset allocation in this column before (Issue 78 August 2009) and the topic will be discussed in more detail when I’m moderating a panel on the topic at the Fund Manager Selection conference in London at the end of March next year. However, with the possibility of advisors choosing passive over active could we see a future where fund selectors will be forced to become pure asset allocators or will there still be a role for people sorting the good from the bad and ugly among active managers?

We have seen the debate of fund distribution and independent advice gaining momentum over the last couple of months, both online at places such as LinkedIn, the professional social network, as well as in traditional media. Considering the Retail Distribution Review it is not surprising to see that the debate draws a large UK audience. I have not seen the same level of interest in the rest of Europe. Maybe we need for the new EU Commission to put the spotlight on this for the debate to get going in the rest of Europe.

With all the moving parts in this equation I would appreciate it if the knowledgeable readership of Funds Europe could weigh in with their insights and experience.

Will more independent advisors or distributors mean an increasingly open architecture or will the trend reverse?
Will more independent advisors or distributors result in a better deal for investors in terms of fees (in other words, will the total fee be higher or lower when fees to the advisor are included)?
Will more independent advisors or distributors mean an increased demand for passive alternatives at the expense of traditional long-only products?
Will more independent advisors or distributors mean falling demand for fund selection expertise?

Niklas Tell is a partner at Tell Media Group AB.