Anyone working in the investment fund industry, whether as supplier, distributor or advisor, is well aware of the changes that are reshaping the environment.
Spurred on by new regulation, distribution models are being overturned, value chains disrupted and new business models developed. At the heart of this is a focus by regulators on more explicit investor protection – in particular through changes in how the fund industry charges for its services and how funds are marketed.
In the old world, costs were to a great extent covered by commissions and distribution models were designed accordingly. As this raised a host of issues around transparency and potential conflicts of interest, regulators in many jurisdictions have been moving to either ban commissions outright or mandate fee disclosure. They are also increasingly implementing stringent rules governing what transpires at the point of sale.
Tools such as suitability tests or investor qualifications require advisors to screen their clients and segment them in terms of their financial savvy, ability to absorb losses, or risk preferences. This influences the products advisors are allowed to recommend. In some cases, as in Switzerland, advisors are required to painstakingly document their interactions with clients and justify their recommendations.
All this is putting pressure on the industry. With increased transparency, prices are generally coming down. With the decrease in the use of commissions, new sources of revenue have to be found. At the same time, new regulations are driving up compliance costs: increased complexity, greater documentation requirements and so on require more resources. The result is a squeeze on margins.
In view of these developments, many are asking if it is possible to reduce administrative expense and operational risk in order to be able to concentrate on their core business without adversely affecting product quality. These are fundamental questions, particularly set against the backdrop of a financial crisis which is slowly drawing to a close.
To complicate matters, regulation is not aligned across jurisdictions. In the UK and elsewhere commissions have been banned outright. In Europe under MiFID they have only been banned for “independent” advisors. In the US, the regulator is looking at the issue. The situation is similarly fragmented in other markets.
How this all plays out will therefore depend to an extent on the jurisdiction. The industry will most probably have to move to fee-based structures and services, as is indeed already happening: Advisors will charge fees for their advice, platforms will charge for their services.
Variety versus complexity versus efficiency
The relationships between investment firms and distributors are becoming increasingly complex, and occasionally more risky. One result is a trend toward a splitting up and modularization of the value chain as asset managers and distributors feel pressure to focus on core competencies. Their competitiveness will no longer be measured simply by product range and performance, but increasingly by efficient provision of services, efficient partnership and network arrangements, and strong risk management.
Yet exactly how value chains reconstitute themselves remains to be seen. For example, whereas in jurisdictions where commissions are banned outright open architectures likely make the most sense, in other areas – such as under MiFID where non-independent advisors can continue to collect commissions – proprietary models may stay in place for some time.
“The relationships between investment firms and distributors are becoming increasingly complex, and occasionally more risky.”
A platform for success
In this new environment, many clients (whether suppliers or advisors) are looking to third parties for ever more sophisticated, value-added services. B2B fund platforms – like UBS’s Fondcenter in Europe – can offer interesting options to meet these needs.
Such platforms provide clients access to both a large selection of funds and a large customer base. At UBS, we carry more than 44,000 funds and share classes from some 330 providers and maintain a network of over 240 distribution partners. If the platform spans many jurisdictions – as UBS’s does – clients can also gain access to significant regulatory know-how, ensuring they are compliant across jurisdictions and can keep up with regulatory change.
Platforms also offer important support capabilities. We provide services in the areas of fund-specific topics, provider management, placement and trading, relationship management and custody. This helps free clients from the burden of managing a vast number of relationships themselves, and provides potential cost savings through automation or the pooling of assets. Benefits run the gamut, from managing commissions (in jurisdictions where these are still allowed), to handling documentation, to providing expertise on distribution-related issues, to robust reporting capabilities.
Platforms are also constantly building up their capabilities as they stay up-to-date with industry transformations. At UBS we have recently revamped our Fund Navigator. With it we provide access to our extensive investment universe as well as a wide-ranging analysis and information tool, and offer sophisticated search functions allowing clients to easily locate the products most suitable to their or their clients’ needs. As we look to the future, we intend to build out this tool significantly. We also will look to work with external partners in areas where this may be more effective or efficient for our clients and us, helping clients among other things gain the advantages of today’s rapid and exciting technical developments.
The fund industry is changing, but also adapting. As new business models are devised, fund platforms can help effectively and efficiently implement them. They can be an important resource and also a trusted partner to help explore this evolving new world.