Rise Of The Machines In Global Funds Distribution by Ernst & Young
Introduction to Connectivity
This issue of Connectivity is the first of a new EY thought leadership series focused on global funds distribution. Future issues will each concentrate on a different aspect of the complex distribution equation. Connectivity won’t necessarily offer exhaustive answers or comprehensive solutions. But we will seek to raise important points of discussion, highlight key trends in the global distribution of funds, and examine where the industry is headed and how we think leading practices can be implemented.
A large portion of the wealth and asset management business model — particularly relating to operations, risk management, technology infrastructure, client reporting and portfolio management — has been addressed from a cost management perspective over the past decade. True growth will likely be achieved only through a firm-wide focus on winning in distribution.
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Further, a rich landscape of vendors providing an exhaustive range of services, from marketing and compliance to quantitative analytics and data management, has developed extensively in recent years. The crucial function that generally defines the success or failure of any asset management firm still remains distribution.
Whether from a technology standpoint, looking at the rise of electronic platforms, or from a regulatory standpoint, looking at the restructuring of remuneration models and client interaction, fund distribution is undergoing sweeping changes. For the industry, several major challenges, such as the restructuring of the compensation model, must be addressed. We hope you’ll find that Connectivity looks at these many challenges, highlights the key issues involved and points the direction for firms to take to succeed at distribution globally.
- Electronic platforms are slowly but inevitably becoming a vital channel in global funds distribution. Few asset managers can afford to continue using distribution models from before the global financial crisis, including status quo models based primarily on face- to-face intermediation or pre-existing market entrenchment, as well as those that offer only limited investor options.
- Interaction between counterparties toexchange information and securities via electronic platforms is nothing new in financial services. However, the global wealth and asset management industry has arguably been the slowest financial services sector to fully leverage the pdwer of rapidly expanding technology and widespread adaptation of screen-based transactions. Instead, distribution in most asset management markets has focused on personal intermediation with little attempt at true innovation.
- Part of the slowness in adapting to new distribution technologies and business practices has been due to the entrenchment of old commission-based compensation models that left little incentive to radically change the system. But widespread regulatory reform of pricing models is now sweeping the globe, notably the Retail Distribution Review (RDR) in the UK and Markets in Financial Instruments Directive II (MiFID II) in the European Union. Additionally, pricing models, such as fee- based approaches, are now firmly in place in the industry. Thus the stage is set for more distribution to move toward electronic platforms and away from face-to-face intermediation.
- Fund distribution platforms and their respective rates of growth vary widely from market to market – as does even the mere definition of the word “platform.” While the industry may be thinking globally in terms of an enterprise-wide distribution strategy, firms must act locally to customize and leverage the platforms used in individual markets.
- Perhaps the most advanced markets for platform distribution are the UK and the US. With the advent of direct-to-consumer (DZC) internet-based securities trading firms in the late 19905, a massive disintermediation process began that moved investors away from personal advice-based distribution. At the other end of the development scale sits Continental Europe, where universal banks still control the bulk of the distribution life cycle, and platforms primarily serve a business-to-business (BZB) institutional function that provides sales support to client-facing advisors.
- A successful platform distribution strategy will require an aggressive and thoughtful leveraging of social media, commitment to building brand identity, a comprehensive investor education program and a high degree of personalization and enhancement of the client experience. These drivers will help to address the key challenge of product differentiation – as well as build customer relationships.
- Given the continued investment in technology and automation of processes, the growth of platform distribution will inevitably squeeze pricing and margins. Certainly, some firms – particularly the largest global managers that can build economies of scale – can attempt to enhance or at least protect some degree of pricing power, particularly through investment in customer experience and building brand identity. However, in the long run, most firms will be forced to adapt to a new world of lower margins and increasing market demands for more screen-based services, more choice, more transparency and more-competitive pricing.
As far back as 1973, during an era when paper forms were physically passed from bank to bank and across vast geographical distances, representatives from a consortium of banks met in a small Brussels office. They created the beginning of what is now one of the oldest and largest electronic platforms in global financial services. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) established a shared worldwide data processing platform and messaging link, along with standardized terminology for international financial transactions. Today, much of the global economy depends on SWIFT for payment processing and, more recently, securities settlement and clearing.
Similarly, in 1972, the National Association of Securities Dealers established an automated quotation (NASDAQ) or messaging system that also entailed standardized terminology for trading of less-liquid securities. Most of the capital markets industry was only marginally interested in the then-nascent NASDAQ platform, as it generally narrowed the bid-ask spread of securities trading, which was effectively the profit margin for broker-dealers. Further, the paradigm of securities trading that had stood firm for nearly two centuries asserted that the most effective model was one of face-to-face intermediation between a buyer and a seller, such as the people walking the floor of the New York Stock Exchange (NYSE).
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