In the words of one senior figure interviewed by the IMA for its most recent annual survey of the industry: “In a way, none of us really know where the boundaries are any more. Everything is blurring.”
That is not to say the distinction between retail and institutional is not important, especially in relation to product regulation and consumer protection. It is just that it is becoming less relevant to fund managers themselves, with the consequence that they are becoming increasingly removed from the end investor.
Why is this? In a nutshell, it is down to the structure of the market and the fact that retail and institutional products are becoming more and more similar.
Fund managers are looking increasingly like manufacturers, dealing with the retail market through wholesale arrangements, for example, via third-party distributors such as fund supermarkets, under a third-party brand on a white-label basis or by supplying asset management as part of a fund-of – fund or managerof-manager offering.
Where certain kinds of distribution networks, such as bank or insurance operations, were previously difficult to access, open architecture and the rise of platform technology are creating new routes to the market.
As a consequence, the relationship between fund managers and end investors has changed. For the average investor, the financial adviser remains the primary point of entry to the products offered by fund managers. However, where fund managers may previously have dealt with small groups of IFAs or direct with the client, changing distribution structures are creating more distance between them and the end investor.
However, there is also one change which brings the retail and institutional markets closer together, namely, the similarity between products. Ucits III has brought in regulatory changes – the one catching everyone’s attention at the moment being 130/30 funds – which mean that products being offered to retail investors are beginning to use institutional-style portfolio management techniques.
With the consumer protection measures that are in place for retail investors, this means that those strategies which have proved positive for institutional investors can be used for the benefit of retail investors.
The big question surrounding all this is what does it mean for our industry and our relationship with advisers? The nature of the relationship means managers now know much less about the individuals investing in their products. That does not absolve them of responsibilities to treat customers fairly but it makes it more difficult to fulfil them.
This is where the relationship with the adviser becomes crucial. Communication between firms and advisers and then advisers and clients is critical and will become even more so as the environment continues to evolve in this way.
At the end of the day, advisers and managers will need to work together closely to ensure the needs of the retail investor continue to be served.
Mona Patel is head of communications at the Investment Management Association