Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

The true “open architecture” distribution model also presents some limits: How can a non- experienced retail investor surf the web and choose from the thousands of products that he/ she can purchase at any on-line fund supermarket? The discussion was on, as mentioned, during the late nineties when internet became mainstream, and it is on again in the early 2010’s with the surge of huge, new, web-based retail platforms such as Amazon or I-Tunes. What will happen to the “traditional” distribution channels if all of a sudden these platforms open up to selling funds to differentiate product offerings? Will retail investors be sent emails explaining what fellow buyers bought and suggesting certain funds only on the pure basis of peers’ past sales, without any advice? Although most European investors are not accustomed to directly paying for advice, with the notable exception of the UK and to a certain extent Germany, most Continental European inves- tors are however accustomed to buying investment funds through retail banking channels or insurance products, and hence having the impression of receiving free advice from the bank employee. In both cases, distribution fees are quite often not presented in a transparent man- ner to the end-investor, but are rather included into a more general fee (e.g. “management fee”). In the UK, where IFAs account for a big portion of fund distribution, they are directly remunerated and thus retail investors are used to the concept of paying for receiving financial advice. This also applies to Germany, a mature market, where investment funds are directly held by as much as 57% of households 7 and where the IFA market has been rising in influence over the past years. This trend seems to be continuing as investors still need guidance. Hence, the third step in the evolution of fund distribution, toward the so-called “guided architecture”. Guided architecture allows fund distributors such as IFAs to offer a pre-selected range of funds, targeting the choice given to the final investor. It should be noted that distribution is soon to be profoundly changed in Great Britain when the new Retail Distribution Review (RDR) regulation comes into play. Set to be enforced at the end of 2012, it will apply to all advisers in the retail investment market, regardless of the type of firm they work for (e.g. banks, product providers, IFAs or wealth managers). “To improve the inter- actions between consumers and the industry, (…) the RDR is set in three measures: Improve the clarity with which firms describe their services to consumers; Address the potential for adviser remuneration to distort consumer outcomes; And increase the professional standards of investment advisers” 8 . The extent to which RDR will reshape the distribution pattern in the UK is a much-talked-about subject and yet there is still not a preferred outcome for it, if not that IFAs will have a much harder job if they still want to be qualified for distributing all products. This may, in our point of view, bring the IFA market to a standstill for the first months after RDR comes into play. Europe is a very fragmented market when it comes to distribution models. Spain and Italy are the strongholds of powerful banks whereas the UK is dominated by IFAs.

1.1

It should be noted that distribution is soon to be profoundly changed in Great Britain when the new Retail Distribution Review (RDR) regulation comes into play.

7 Source : Ignites Europe “Germany: A hot spot for managers”, 05/01/2011 8 Source : FSA, for further reference, please see http://www.fsa.gov.uk/Pages/About/What/rdr/index.shtml

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