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Choices and challenges

As well as product and distribution choices in the run-up to the RDR, asset managers will also face consolidation of fund ranges and a squeeze on TERs as investors try to get cheaper fund fees

What are the choices facing asset managers in the run-up to the RDR? There are a number of choices, both on the distribution and the product side.

On the distribution side, fund management groups have to decide whether they re-enter the direct-to-consumer market and offer an execution-only service. We are expecting up to 30 per cent of advisers to leave the market as a result of the RDR, which will result in a significant shortfall in the availability of advice for medium and low-end investors.

The IFA will be more focused on dealing with his “best” clients. Also, medium and low-net-worth investors do not want to pay for advice. If fund managers go down the execution-only route, they then have to decide how they are going to offer that service.

The second choice is whether fund managers want to deal directly with the IFA. If they do, they will have to facilitate customer-agreed remuneration and that will be complex. Many fund managers do not want to go down this route. In this case, their choice is to go via a platform. For Schroders, 90 per cent of our business comes through platforms already, including wraps, fund supermarkets and insurance platforms.

On the product side, the key product change will be the increased use of low-cost funds. We expect to see fund managers provide a choice of a low-cost product segment.

What are the challenges facing asset managers in the run-up to the RDR?
The choices are potentially opportunities but I do think that some managers who are not willing to adapt will struggle to cope in the RDR world and are in danger of being left behind. A number of groups have said that they will not enter the low-cost market and will only operate within a certain segment. We believe that segment could get smaller and these groups will have to fight harder to maintain their position.

Will the RDR lead to the consolidation of asset managers’ fund ranges?
If a fund management group is reliant on IFAs and the number of IFAs falls by 30 per cent, who will make up the shortfall? If the direct market increases, how do you get to the execution-only market? You have to get your brand well known. You need to start thinking about that now because brand awareness will become increasingly important and building a brand is not cheap.

It is likely to lead to a consolidation of the asset managers’ fund range. The way fund ranges are developing, including ours, is that there are two types of product. The first is a low-cost core product. This is passive or run in an active way but not straying too far from the index. The latter might target 1 per cent outperformance, for example.

’We are finding that advisers are doing a lot of work segmenting their client base. Low-net-worth clients will struggled to find advice as advisers will concentrate on the top end’

On the other side, you have funds such as Richard Buxton’s alpha plus fund. This will be higher cost but these are funds that you cannot replicate in a low-cost way. They will be specialist, recovery, alpha, income or sector funds. People invest because they believe that they will outperform.

If there is a squeeze between alpha-targeting funds and index-trackers, what happens to the firms in the middle?

Those funds that are charging specialist high alpha fees for core-type performance will be found to be swimming naked. This will be exposed by unbundling, where there will be much more emphasis on value for money. In our own fund range, we had two funds that fell into that camp. They were core-type products and were not delivering. We merged them into our high alpha offering.

If you look at the Schroder range now, we have divided into these core and high alpha offerings and I suspect more firms will go down that route.

How will RDR affect fund manager remuneration?
There will be a squeeze on TERs. Investors will try and get cheaper fund management fees and we are factoring in a decline in margins. But I believe that platform remuneration will be hit far more severely, particularly at the top end. 0.5-0.6 per cent simply for the provision of administration services will prove too rich.It is about making sure that funds are appropriately charged.

How can asset managers help IFAs show their clients they are adding value?
Fund managers need to come up with good quality investment solutions. For example, one of the biggest themes is a demand for income so we create products that deliver a good income for clients, such as the income maximiser.

How will RDR affect the advice market? We are finding that advisers are doing a lot of work segmenting their client base. Low and networth clients are going to struggle to find advice. Advisers will concentrate on the top end. The rest will be taken up by the banks and insurance companies offering internet-based solutions. These have to be execution-only as no one wants to offer advice to the medium-networth market it is too dangerous, too costly and there are not enough rewards.

How will the asset management landscape look in five years’ time?

The discretionary market will continue to grow, particularly as more advisers will outsource. It has been said before but I think there will be fewer fund managers around. There are no new fund managers emerging and New Star, Gartmore and others have left the market. There will be niche firms and large firms. Those in the middle will be squeezed.

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