Assets held on UK platforms represent over a quarter of the more than €2trn (£1.8trn) assets on-platform in Europe, according to Platforum data. The UK is the leading open architecture market for funds thanks to predominantly adviser-led distribution. In continental Europe, where distribution is bank-dominated, open architecture also picked up over the last few years. In both cases, however, the general feeling is that fund concentration is increasing.
Fund buy lists have a great deal of responsibility for this fund selection bottleneck. In the UK, recent Platforum data shows that 70 per cent of adviser firms have a centralised investment proposition which in many cases involves having a buy list of approved funds. In addition, several direct platforms have cut down the number of funds in their select lists – lists of around 50 funds are now typical.
What are the dynamics of fund buy lists in the main European markets beyond the UK?
The leading German banks tend to establish partnerships with a limited number of fund groups – nine on average according to Platforum analysis. A selection of 10 fund groups – including international companies like of BlackRock, Deutsche Asset Management, Fidelity and JP Morgan Asset Management – accounts for 70 per cent of the of partnerships we analysed. There is a strong bias towards well-known brands with a wide product range and well-staffed sales teams. Multi-asset specialist Flossbach von Storch barely gets a spot despite its star manager reputation in Germany.
In addition, the Attrax platform runs a buy list which acts as the third-party distribution gatekeeper of the cooperative banks. Overall, we estimate that these partnerships influence most of the €80bn in third-party funds distributed through German banks.
In Italy, distribution of third-party funds relies heavily on the adviser networks of the leading financial institutions – the promotori finanziari. It is essential for fund groups to establish fund partnerships to get onto the buy lists of these 20 or so influential distributors, and this involves the payment of demanding rebates.
Platforum analysis of these preferential lists shows an average of 23 partnerships per promotori network. While this means that fund group representation is wider than in Germany, concentration is still high with just a third of the fund groups featured comprising three quarters of the partnerships. Pictet Asset Management and Schroders, for example, were present in all the partnership lists we analysed.
However, some adviser networks that have in-house asset management divisions are considering a reduction in the number of fund groups they work with, which may bring more concentration of assets into fewer fund groups.
Distribution dynamics are very different in France with 60 per cent of open architecture flows being channeled through life insurance ‘unit-linked’ contracts. We expect insurance companies to narrow down their fund offerings in response to impending regulatory changes – Priips and the Insurance Distribution Directive (IDD). This is likely to make fund partnerships even more attractive although the cost of entry might become prohibitive for many fund groups.
In the banking space, the retail offering is focused on in-house funds while French private banks are joining their Italian and Spanish equivalents in launching discretionary portfolio management solutions in anticipation of Mifid II. Internal buy lists run by the likes of Amundi, FundQuest or Vega Investment Managers will still be the gateway to fund selection by portfolio managers within these banks.
Mifid II is set to bring an even higher concentration of assets into fewer fund groups.
The directive prevents distributors – such as banks and wealth managers – from retaining the fund rebates which they take for the provision of independent advice and discretionary portfolio management. In addition, it brings stricter compliance requirements. The result is that fund selection teams within small and medium-sized banks are shrinking and lengthy fund buy lists are being replaced with shorter lists of preferred partners.
This is positive for the larger asset managers that operate cross-border because they tend to offer a comprehensive range of funds across different sectors. There might also be opportunities for local boutiques that are able to complement the offering of the larger groups with specialised strategies.
We also see financial institutions outsourcing their fund selection operations to investment consultants, research agencies, larger banks and also platforms. Some institutional platforms – Allfunds Bank, Attrax or Axeltis – have been competing in this area for some time and Credit Suisse’s fund platform, InvestLab, is the latest to join the club.
There is a danger that increased outsourcing could lead to the commoditisation of fund buy lists and even greater concentration into a small number of asset managers. But on the other hand, it is a useful strategy for banks who may have conflicts of interest with their own asset management units.
The open architecture journey in the UK and continental Europe is a story of increasing concentration among a relatively small number of fund groups. Asset managers looking to broaden their distribution must expect further bottlenecks!
Rodolfo Crespo is a senior analyst at Platforum