One significant observation he made was that “three years ago it looked like the fund industry was going to wipe out the life and pension providers, today it looks like the reverse might happen.”The more I thought about his comments, the more I realised he is correct. With the notable exception of the major fund super-markets which have put innovation and effective use of e-commerce at the heart of what they offer, the present level of services from the vast majority of fund groups is bordering on Dickensian. Having looked at this issue for a little while now, I am rapidly coming to the conclusion that we could be witnessing the death of advised retail fund distribution in the UK other than by fund supermarket or wrap account. This week, I will look at some of the arguments for and against fund managers dismantling their direct and IFA distribution operations and subordinating that role entirely to the fund supermarket and other platform communities. In my next column in two weeks, I will look at some of the issues that fund managers need to address urgently if they are to make up for the considerable ground they have lost in recent years and be able to maintain the level of service that advisers are increasingly coming to demand as a minimum standard. Looking at the industry as a whole and accepting there are a handful of honourable exceptions, when trying to find a business in another industry delivering an equivalent level of service to most fund managers, Easyjet was the most obvious people to come to mind. One of the major challenges facing fund managers today is whether they continue to seek to attract new investments direct or should they accept that all new investments will originate via one or other of the fund supermarkets. There are many attractions for some fund managers in receiving new investments in this way. The administration is outsourced to a large extent and the amount of documentation they have to produce for individual investors is minimised. Even the number of transactions can normally be reduced to a single balancing transaction per supermarket on each fund each day to represent the net movement inflow or withdrawal of funds on that day. The greater the percentage of a fund firm’s business that is written through fund supermarkets, the more expensive per transaction it can be to keep open the capacity to receive business direct and the more compelling it may appear for a fund manager to close their own new business capabilities. The majority of new fund business being placed by advisers, especially Isas and Pep transfers, will undoubtedly now be submitted via a fund supermarket. It is far easier for the advisers as they can place a client’s investments with a wide range of managers via a single service, receive aggregated valuation information and commission statements. Switching between different funds and managers within the same supermarket is far easier and any settlement can be carried out by the supermarket. At the same time, the whole process can be far easier for the individual investor and can permit them far greater flexibility. Against such a background, it is hard to see how the extent of direct investment into funds cannot but continue to decline significantly in the near future and if the writing is on the wall for direct new business facilities for funds, then perhaps the logical thing to do is to shut them down now on the basis that as they become a smaller and smaller percentage of overall business received, the true cost of maintaining these services increases greatly due to marginal use. Let us for a moment allow this thinking to develop a little further. If it has been recognised that it is no longer viable to process direct new business, why should the fund manager go to the considerable expense of maintaining an individual’s existing investments outside a platform? Would it not be better to go to all your IFAs and carry out an exercise to arrange for all the direct assets to be re-registered on to one of the major supermarkets? Where investments were not originally placed via an IFA or the adviser is no longer in existence, shouldn’t the fund manager arrange with one or more supermarkets for them to carry out a bulk transfer of the business on to their platform? A number of similar exercises have been carried out in the recent past when firms have exited from small direct equities’ businesses because they were not profitable. Why shouldn’t the same process apply to small individual fund investments? By aggregating these with a client’s other investments, there is far greater potential for them to be managed economically and the fund management group can remove the expenses of servicing uneconomic investors. In summary, closing down their direct and non-platform operations could achieve significant savings for fund managers and make life easier for advisers and consumers, so why isn’t everybody doing it? The answer probably is because it leaves the fund management groups virtually totally reliant o the fund supermarkets for distribution. Increasingly, they would lose any direct contact with end-distributors and ultimately could run the risk of becoming totally commoditised. There has already been resistance in some quarters to changes in the levels of charges which some fund supermarkets make to fund managers. The leading supermarkets have established a dominant position in the new fund market, especially in intermediated business. This already makes it very difficult for anyone other than the true star brand to resist such changes to tariffs. If funds were to become totally reliant on fund supermarkets for all their distribution, their negotiating position would become even weaker. As the size of fund supermarkets with individual managers’ portfolios grows, we will inevitably see an increasing in mezzanine pricing. Ideally, this saving will be passed on for the benefit of the investor but time will tell the extent to which this will be the case. In reality, the fund management community has seen nothing like the level of consolidation which has taken place in the life and pension market. The number of life offices has been cut drastically in recent years and most analysts predict there will be further consolidation in the next few years. Successful financial services businesses in the 21st Century are likely to either have scale or to be niche players. Dramatic consolidation in the fund management industry must be inevitable in the next few years. As part of that process, or perhaps in preparation for it, there are good reasons why many fund firms should look seriously at dismantling those parts of their existing operational infrastructure that are remnants of a bygone age. By slimming themselves down and focusing on their core competence, they may position themselves well to remain effective and independent rather than succumb to takeovers. For those that want to maintain their distribution presence in their own right there are some urgent steps that need to be taken to improve their service propositions. I will address these matters in my next column in Money Marketing in two weeks’ time.
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