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what’s nextfor funds?
D i s i n t e r m e d i a t i o n a n d t h e f u t u r e o f f u n d d i s t r i b u t i o n
A funds europe survey in conjuction with Clearstream
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disintermediation is transforming the way
funds are distributed, which is why it is a fitting subject
for the first in a series of research reports, written by
Funds Europe in association with Clearstream, that
examine what the future holds for the funds industry.
Among the highlights of our survey:
• 80% of respondents believe customers get a better
deal when their providers offer open architecture
(a range of funds from competing fund managers)
• 59% think open architecture is under threat from
financial and regulatory pressures
• 48% believe robo-advisers will become the industry
standard for dealing with retail clients (those with less
than $1 million of investable assets)
• 14% think robo-advisers will become the industry
standard for dealing with high-net-worth clients (those
with more than $1 million of investable assets)
• 67% believe passive funds such as ETFs will gain a
bigger proportion of fund flows than actively managed
funds in future
• 58% think today’s investors are more sophisticated
than they were five to ten years ago (but 21% disagree)
• Respondents believe, in future, online direct models
will be the main channel for distributing funds,
performance the most important driver of investment
and advisers the main place investors go for advice
A total of 192 funds professionals participated in the
online survey. See ‘survey methodology’ (page 14) for
more information.
Highlights from the report
a world of change
4
industry survey
technology and changing consumer tastes are revolutionising the way funds are bought and sold. a survey by Funds Europe and Clearstream
gauged the sentiments of the asset management industry.
disintermediation and the future of fund
distribution
twenty years ago, a middle-aged
couple who planned
to go on holiday might
walk into the premises
of their local travel
agency, choose from a
list of destinations and
leave it to their agent
to book the flights,
hotel and transfers.
Today, it is relatively
rare for prospective
holidaymakers to leave
it all to an agent. The
popularity of price
comparison websites for
airlines, and access to
user-generated reviews
of hotels, restaurants
and resorts, have
emboldened foreign
travellers – both young
and old – to do much
of their research and
bookings themselves.
The funds industry is
undergoing a similar
change. Whereas in
the past, the channels
for distributing funds
were well established
– the couple in our
above example might
have gone to see their
financial adviser, or
a representative at
their bank – today, a
far greater number of
people are likely to
do their fund research
themselves. That has led
to a rise in investment
5
2. open architecture should be the standard method of distributing funds across the industry
42%
15%
9%
32%
on fund platforms as
investors take advantage
of the opportunity,
offered by the internet,
for them to direct and
manage their fund
portfolios themselves.
Clearly, distribution is
changing. This research
project, which is planned
to be the first in a series
of reports in association
with Clearstream,
takes a high-level
view of a key theme
affecting the evolution
of fund distribution,
disintermediation.
By threatening
the conventional
gatekeepers that
historically separated
fund investors from
fund managers,
disintermediation
is opening up new
possibilities, and new
business risks, for the
asset management
industry.
This report will
provide a basis for
future surveys, with
an in-depth report on
exchange-traded funds
(ETFs) scheduled as
the next in the series.
Our hope is that, by
examining the sentiment
of the funds industry
on the factors affecting
it, we can predict
how the future of fund
distribution will look.
open architectureOpen architecture is not
a new concept for the
funds industry, but its
application is certainly
in line with the trends
of the digital age.
Describing a system
that offers access to
funds from a wide
range of providers,
1. when distributors offer an open architecture platform – a range of funds from competing fund managers – investors get a better deal
36%
44%
13%
1%
6%
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
2%
6
industry survey
open architecture
is prized by fund
platforms, which boast
about how many funds
they can offer. (In this
respect, fund platforms
are similar to travel
comparison engines,
architecture was in the
interests of the end
investor (see page 14 for
survey methodology). Of
the 192 respondents that
answered this section of
the survey, 80% agreed
with the statement that,
‘When distributors offer
an open architecture
platform – a range of
funds from competing
fund managers –
investors get a better
deal’ (figure 1). Of this,
36% strongly agreed.
Only 7% disagreed. As
far as our respondents
were concerned, open
architecture is clearly a
boon for fund buyers.
Given this belief
that open architecture
benefits investors, it
should be no surprise
that almost as large a
majority agreed with the
statement that, ‘Open
architecture should be
the standard method
of distributing funds
across the industry’.
Nearly three-quarters
of respondents, 74%,
agreed with this view –
of which 32% strongly
agreed – while only
11% rejected it (figure
2). It is reassuring
that our respondents
4. technology, such as robo-advisers, helps investors make better decisions
3. open architecture is under threat from financial and regulatory pressures
such as Skyscanner,
which markets itself as
having access to a very
wide range of airline
websites.)
Our survey revealed
a strong belief among
respondents that open
17%
42%
23%
1%
17%Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
8%
25%
42%
4%21%
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
7
38%
25%
25%
2%10%
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
wanted the industry to
do what they believed
was in the interests of its
customers.
However, there has
been some media
coverage in the past
few years that suggests
fund distributors are
facing financial or
regulatory pressures
that may discourage
them from maintaining
open architectures.
Some banks have
reportedly stopped
selling third-party funds
in order to push their
own branded products,
while some advisers
have dramatically
reduced the number
of external managers
they use in order to cut
down on operational
complexity or to reduce
client servicing costs.
Regulation such as
Mifid II, by setting
rules on payment of
retrocessions to improve
transparency, will have a
big impact on the sector.
Our respondents
recognised these
concerns. A majority,
59%, agreed that ‘Open
architecture is under
threat from financial and
regulatory pressures’
(figure 3), of which
17% strongly agreed.
There were some
doubters, however,
with 18% disagreeing
with the statement.
Nearly a quarter, 23%,
maintained a neutral
stance, a figure that
perhaps reflects the
complexity of the issue.
technologyPerhaps the most
divisive issue examined
in this survey concerns
5. robo-advisers will become the industry standard for distributors and financial advisers to deal with retail clients
6. robo-advisers will become the industry standard for distributors and financial advisers to deal with high-net-worth clients
20%
48%
5%9%
18%
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
8
industry survey
the role of technology
in guiding investors to
make the right choices.
Robo-advisers, which
use algorithms to
propose investment
suggestions based on
user inputs, are being
touted as a revolutionary
development in
the world of fund
distribution that
will allow millions
of investors to get
personalised investment
advice at much lower
costs than if they were to
go to a human adviser.
But robo-advisers
are bitterly opposed
by many traditional
distributors, who argue
there is no substitute for
the human touch.
The 188 respondents
who answered this
section of the survey
were divided almost
equally between the
33% who agreed that
‘Technology, such as
robo-advisers, helps
investors make better
decisions’ and the 25%
who disagreed (figure
4). Interestingly, the
most popular position
on this question was to
withhold judgement,
with 42% of respondents
staying neutral. The
large number of people
who have yet to form
a judgement on this
question suggests the
case for robo-advisers
has not yet been
satisfactorily made.
Respondents were also
split on the question
of whether ‘Robo-
advisers will become
the industry standard
for distributors and
financial advisers to
deal with retail clients
(those with less than
$1 million of investable
assets)’. Although nearly
half, 48%, agreed with
the statement, a sizeable
minority, 27%, disputed
it, while a quarter
stayed neutral (figure
5). Retail investors with
relatively low wealth
are usually seen as the
most appropriate users
of robo-advisers, but,
clearly, not everyone
believes this is the best
option for them.
There was less dispute
when it came to richer
clients. The statement,
‘Robo-advisers will
become the industry
standard for distributors
and financial advisers
to deal with high-net-
worth clients (those
with more than $1
million of investable
assets)’ was opposed
by more than two-
thirds of respondents,
68% (and among
that, 20% strongly
7. robo-advisers will never become the industry standard – investors will always need human interaction
35%
23%
23%
7% 12%Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
9
opposed it). A mere
14% agreed with the
statement, suggesting
the industry is a long
way from integrating
robo-advisers into,
for instance, private
banks. The message is
clear: when it comes
to wealthy investors,
human advisers are here
to stay.
The ambivalence
towards robo-advisers
was reflected in the
final question on this
section of the survey.
Respondents were
asked to agree or
disagree with ‘Robo-
advisers will never
become the industry
8. etfs are a suitable core investment for retail clients (those with less than $1 million of investable assets)
45%
19%
16%1% 19%Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
standard – investors
will always need human
interaction’. Nearly half,
47%, agreed, while 30%
disagreed and 23%
stayed neutral (figure 7).
Passive fundsAnother trend that is
upending establishing
models of fund
distribution is the
growth of passive
10
industry survey
investment, especially
exchange-traded
funds (ETFs). Low-cost
and transparent, ETFs
are gathering more
and more assets. The
benefits to institutional
investors are clear –
exposure to equity
or bond indices at a
fraction of the cost of
actively managed funds.
But some have argued
ETFs are not suitable for
retail investors.
Our respondents
generally felt ETFs
are suitable for retail
investors. A majority,
64%, of the 184 people
who answered this
section of the survey
agreed that ‘ETFs are a
suitable core investment
for retail clients (those
with less than $1 million
of investable assets)’,
of which 19% said they
strongly agreed (figure
8). Only 17% disagreed.
Respondents were
less sure when the same
question was asked of
richer clients. A slim
majority, 56%, agreed
that ‘ETFs are a suitable
core investment for
high-net-worth clients
(those with more than
$1 million of investable
assets)’.
A fifth disagreed
with this statement,
while slightly more
respondents than in the
previous question were
neutral (figure 9).
Will ETFs and
other passive funds
continue their healthy
asset raising? Most
respondents thought
they would. Two-thirds,
67%, of respondents
9. etfs are a suitable core investment for high-net-worth clients (those with more than $1 million of investable assets)
38%24%
17%3% 18%Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
10. in the future, passive funds such as etfs will gain a bigger proportion of fund flows than actively managed funds
11%
48%
21%
1%19%Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
11
agreed that ‘In the
future, passive funds
such as ETFs will gain
a bigger proportion
of fund flows than
actively managed funds’
(figure 10). Of this, 19%
strongly agreed. Only
11% disagreed, with the
remaining 21% staying
neutral.
educationOne of the
consequences of a
greater proportion of
self-directed investors in
the market is a greater
need for financial
education. If today’s
fund buyers are more
empowered than before,
it stands to reason that
they ought to be better
equipped, mentally, to
determine which funds
are right for them.
Respondents generally
agreed that investors are
more sophisticated than
they were in the past.
The statement, ‘Financial
education has improved
– today’s investors are
more sophisticated
than they were five to
ten years ago’ met with
agreement from 58%
of respondents, and
was disputed by 21%,
while another 21% were
neutral (figure 11).
Future modelsAs stated at this
start of this review,
disintermediation
is changing the way
funds are distributed.
But what entities will
become the most
important distributors
of funds? We asked
respondents to rank
the likely importance
of five channels in ten
years’ time (in the chart
below, a higher number
indicates a greater
expected importance).
The channels included
the traditional channels
– independent financial
advisers and banks – as
well as online direct
access models, in
which asset managers
sell funds directly to
investors.
We also asked
respondents if retail
specialists such as
Amazon or Google,
neither of which is
substantially involved
in the funds industry
at time of writing,
would become
important distributors.
Respondents also had
the chance to estimate
the importance of a
‘wild card’ factor – new
entrants to the market
that are not yet known.
Based on average
11. financial education has improved – today’s investors are more sophisticated than they were five to ten years ago
20%
47%21%
1%
11%
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
12
industry survey
ranking, the 150
people who answered
this section of the
survey predicted that
online direct access
models would be
the most important
channel, followed by
independent financial
advisers, banks, retail
specialists and unknown
new market entrants
(figure 12).
The survey also sought
to establish which
qualities among funds
would be most decisive
in attracting investor
flows. Would brand be
more important than
investment strategy
in ten years’ time?
How important would
accessibility be?
The ranking was
clearer for this question
than for the last.
Respondents judged
that performance would
be the most important
Online direct access models
Independent financial advisers
Bank distributors
Retail specialists (eg. Amazon or Google)
New entrants to the market we don’t yet know about
Importance, based on average ranking
12. in the future (10 years from now) how do you believe funds will be distributed?
Performance
Ease of access
Brand
Investment strategy
Size of fund
Importance, based on average ranking
13. what do you feel will be the most important drivers of investment in the future?
13
factor, followed by ease
of access, brand and
investment strategy.
Fund size was predicted
to be the least important
factor by a large margin
(figure 13).
The final question
asked how investors in
the future were likely
to get investment
advice. The average
ratings were close
together, indicating
that respondents did
not, on the whole, have
a clear idea about
which methods would
dominate.
The good news for
investment advisers is
that they were predicted
to be the most important
source of advice in ten
years’ time, followed
closely by independent
rankings and peer
group advice, which
were tied (figure 14).
Robo-advisers came
next, but the average
ranking was close to
the top three. The
only method that was
clearly not favoured
was social media.
Disintermediation
is one of a number
of factors affecting
the evolution of fund
distribution. This
survey indicates a
strong belief that open
architecture is in the
interests of investors,
that robo-advice has a
role to play in serving
clients (though this is
disputed by some), and
that passive funds are
anticipated to be a key
part of fund portfolios
for many investors.
The future is uncertain,
but the results of this
survey indicate some
possible directions
of travel. Clearstream
and Funds Europe plan
further in-depth surveys
to probe the issues
uncovered in this report,
with a further piece
of research on ETFs
scheduled as the next
in the series. We hope
the results of our work
prove useful to those in
the asset management
industry who are
planning their strategies
for the future.
Importance, based on average ranking
14. how do you think investors will look for investment advice in the future?
Investment advisers
Peer group advice
Independent rankings
Robo-advisers
Social media
survey methodology
A total of 192 professionals drawn from
Funds Europe’s readership, who work in
various positions across the funds industry,
participated in the survey that was conducted
online between November 17 and December
16, 2016. The number of respondents who
completed each section of the survey is as
follows:
Open architecture: 192
Technology: 188
Passive funds: 184
Education: 183
Future models: 150
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