The arrival of fund supermarkets in the past few years has shown that how funds are distributed has changed for good. Frances Maguire reports on a new breed of mini-mart waiting in the wings.
The days of a single distribution channel for banks and insurance companies for their own funds have long passed. Today, effective distribution is based on a diversity of sales channels, old and new. Since 1994, sales of third party funds in the US have increased rapidly over those of proprietary funds. Much of this has been down to two platforms – Fidelity and Charles Schwab – which have gone direct to the investor.
In Europe, especially the UK and Germany where the bulk of investment advice is given by independent financial advisers (IFAs), two types of fund supermarkets have emerged. There is the direct model offered by the likes of Schwab and online banks, such as Egg; and there are the processing and distribution hubs for IFAs.
Another key difference between the US and Europe is that the relative success of fund supermarkets has coincided with a bear market. Almost as soon as the concept of third party distributor vehicles such as fund supermarkets has been established, consolidation is expected.
Customised distribution
In Europe, it is in Germany where open architecture is being implemented the quickest. About 15 customised distribution platforms have grown up from providers such as Fidelity, which launched last year, Deutsche Bank and Commerzbank – all chasing the same market share of IFAs. However, this number is expected to consolidate down to about three or four players because, apart from the fact that there is not enough business in a bear market to support so many platforms, there is too much choice and IFAs are struggling to find the best service, at the best price.
The same can be said for the UK, where consolidation is also expected. Stuart Dyer, chief executive officer of Cofunds, a UK fund supermarket jointly owned by State Street and DST Systems, which was launched in February 2001, believes consolidation in the UK will occur. He says: “Three years ago, there was no such thing as a fund supermarket in the UK. Today at least 25% of third party fund distribution is handled by fund supermarkets. There are currently six or seven fund supermarkets servicing the IFA market in the UK today, but this will reduce to just two players over the next couple of years.”
Apart from the inevitable consolidation in the IFA market, Mr Dyer says the need to achieve scale in order to take market share will reduce the number of UK supermarkets.
The role of the fund supermarket in the UK is twofold: to distribute funds through IFA networks and to handle much of the administration for the IFAs, helping them to move from a paper to an electronic environment. For the fund provider, too, the role the supermarket plays in the re-registering of customer portfolios into nominee accounts means that the supermarket is taking on record-keeping and certain administrative functions of the fund provider.
New business
For Ian Chimes, managing director of Credit Suisse Asset Management Funds (UK) (CSAM), the key benefit of the growth of fund supermarkets has been the new business from a new distribution channel. “In the last year, 10% of CSAM’s gross sales has come from fund supermarkets. This is 10% from a standing start,” he says.
CSAM distributes through four UK fund supermarkets: Cofunds, Fidelity, Selestia (owned by Old Mutual) and the platform run by IFA, Hargreaves Lansdowne. The business model is encouraging CSAM to reconsider traditional models of distribution, says Mr Chimes. “The question still is who will be tomorrow’s winners in terms of distribution. Certainly we are very optimistic for the IFA market, as those who deal direct with investors,” he says.
Aberdeen Asset Management’s growing reliance on fund supermarkets has coincided with a restructuring that meant the investment house focused less on the UK retail market and more on the European market. Gary Marshall, head of sales and marketing at Aberdeen, says this has meant that its UK business is now focused on the use of fund supermarkets. “It is the difference between the corner shop and the supermarket and we have been actively working to get our products on as many shelves as possible.”
Aberdeen now distributes through about 11 direct and IFA fund supermarkets in the UK and, along with distribution to high-net-worth investors through private banking relationships, the business accounts for 30%-40% of its gross annual sales.
While Mr Marshall believes that consolidation is inevitable and that a quantum leap is still needed before retail investors use online supermarkets for anything else but research, it is a channel on which Aberdeen will continue to focus. “The fact that the fund supermarkets can offer part-investment in a range of funds as a part of wrap products means that we are getting more business for less overheads from them,” he says.
Processing centres
Furthermore, Aberdeen is increasingly looking to the IFA supermarkets as processing centres as re-registration of assets by the IFAs enables it to pass over individual record holding to the supermarkets.
He also believes that its relationship with private banks will stand Aberdeen in good stead in the new multi-tie marketplace that is about to hit the UK. The real challenge to fund distribution in the UK – with moves by the UK regulator to depolarise the investment landscape – is yet to come. The UK’s Financial Services Authority’s consultative paper 166 proposes that the current regulation, ensuring that investment advice is either totally independent or clearly tied, is relaxed. This will enable high street banks and insurance companies to, in effect, create fund supermarkets of their own as it will mean that they can offer a selection of hand-picked funds to their customers.
Fund mini-marts
In many ways, by using the outlets already in place, banks are creating fund mini-marts. First off the mark has been HSBC, which has forged ahead with its plans to go live as soon as possible, slated for early 2004. Further announcements by banks are expected in the coming months as tie-ups become formalised.
For Mr Marshall, the financial planning advice that the banks will be giving, as well as the pre-chosen panel of offerings, makes the multi-tie business an attractive proposition. He says: “It is all very well for online direct supermarkets to offer powerful search engines that can whittle down a search criteria to just four or five funds, but how does the investor chose between this selection?”
Sales of funds still occur at the point where advice is given. But for Brett Williams, managing director of Selestia, the move is an ill-advised, backward step, blurring the lines between tied and independent advice that took years to establish. “We believe the Financial Services Authority proposals will fail to meet their stated aims of increasing choice and improving access to financial advice. What this regime will herald is a new age of confusion for the consumer,” he says.
The distributor becoming the adviser flies in the face of the distribution models, Mr Williams believes. “Selestia will remain committed to the principle of independent financial advice. However, it appears that ‘distributors’ will be doing almost what IFAs could but with restrictions. We can only wait and see which way the industry leaps, if these recommendations are introduced.”
