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The new adventures of Supermart

The term “fund supermarket” arrived on the scene during the build-up to what we now know was a technology bubble. We learned about them straight from the US where two firms in particular, Fidelity and Charles Schwab, had carved out and dominated a new, one-stop, internet-based fund distribution channel. Goodbye bricks and hello clicks.

The supermarket concept was fuelled by the demand for ever greater investment exposure to meet individuals&#39 needs. It was driven by a shift to personal pension provision and the unpopularity of proprietary in-house funds.

In no time, the UK and European marketplaces took off as well, with much promise. This was combined with the discovery in Europe of the mass affluent, leading to a wealth management and fund supermarket bubble in its own right. One forecast in mid-2000 expected around 300 fund supermarkets to be up and running by now.

That was then, this is now.

The landscape has changed dramatically. Many hundreds of millions of pounds of investment later, the arrival of a fund supermarket on every corner has just not come to pass and there are many high-profile casualties, failed projects and broken budget promises.

The mass affluent have almost completely disappeared back to where they came from – the land of cash and near-cash investments,a place wrongly perceived to be of lower risk.

Established distribution, particularly the IFAs in the UK and the banks and insurance companies on the continent, has remained remarkably dominant. So is this the death of the fund supermarket? For the old-fashioned ones the answer is “perhaps”. For the new breed, “absolutely not”.

The key drivers of change remain in place – an ageing population which lives longer, the transfer of pension provision from the state and corporations to individuals and the demand for funds from the best managers.

These trends are here to stay and will, without doubt, drive individuals, over time, to make greater investment provision for the future. But they may need some help along the way through bigger carrots, such as tax breaks, or bigger sticks, such as compulsion.

The FSA proposals regarding CP21 will move us along further towards open architecture.

Financial products today are hugely more accessible because of the internet. Investors have never had so much power to search and compare, customers have never had such an ability to monitor and follow how their investment decisions are doing. The internet, as many organisations and individuals have discovered, is first and foremost a new overhead. But in the world of fund distribution it is an unavoidable expense. Not having the net would be like not having the PC or the phone.

This is where fund supermarket technology and service comes into play. Organisations that continue to have ambitions to distribute funds to individuals, regardless of the channel they are in, will inevitably introduce elements of the internet-based fund supermarket proposition.

But in most cases this will be integrated into their own distribution infrastructure such as call centres, intermediaries, branches and agents.

This is an opportunity to modernise and reinforce traditional sales channels and methods as well as supplementing them.

There will be room for a few classic, free-standing, fund supermarkets. But their volume of business will be limited if they stick to information only or simple product offers, as the need for individuals to seek help and advice in making their investment decisions grows. As in the US, there is only likely to be room for a few of them in each of the major European markets.

How will the fund supermarket change in the future? It will have to be integrated with existing distribution channels and enhance them. It must be able to transact online, keep individual customer records and provide features for analysis and reporting.

Independent research by Datamonitor predicts that the IFA route to customers will continue to be dominant, at least until 2005. But it also expects the banks and insurance companies who subscribe to a non-proprietary fund strategy to gain ground through the application of supermarket technology and service.

There are benefits for all participants. The investor has easier and speedier access at a lower price, together with enhanced performance measurement and taxation reporting. The distributor gets modern technology in a legacy technology business and enhances its distribution methods. It can make its salesforce more productive and more professional. The fund manager replaces huge numbers of small retail orders with single bulk institutional orders, removing much of the admin burden.

Fund supermarket technology and service will survive but in a very different form than predicted just a few short years ago.


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