RETHINKING DISTRIBUTION

Improve communication between AM firms and distributors

Implications of the Continental Europeanmodel towards further vertical integration

With increasing regulation at the point of sale, distributors will need to control compliance risks and therefore require AM firms to provide distributors with high transparency, training, adequate marketing tools and any other relevant services. As distributors will increasingly rationalise their processes, they will limit the number of their AMproviders and try to develop close relationships and improve the flows of information with them. Regulation will heap additional costs and burden on distributors. As it will be difficult for distributors to pass on these costs to investors, they are likely to put pressure on AM firms, especially given the power they have over a captive clientele, to increase the levels of commissions resulting in decreasedmanagement fees. AM firms couldmitigate this decrease in their revenues through increasing or setting-up higher levels of performance fees. Decrease of management fees and introduction or increase of performance fees

Integrated AM firms should maintain the widest possible range of products Large distributors like banks and insurance companies will require their AM arms to offer a wide range of products suitable for different categories of clients (retail investors, HNWI, corporate and other institutional investors). In order to address the needs of their various clients and react rapidly to any change in client preferences andmarket fluctuations, they will require AMproducts to cover all themainmarkets through most asset classes and investment themes. This means for integrated AMfirms that they will have tomaintain off-the-shelf funds with low AuM and therefore lower profitability levels. As integrated AM firms will already have to manage large product ranges they may no longer have huge opportunities to develop and test new investment ideas and strategies. As a consequence, they will leverage on independent AMfirms that can demonstrate capacity to deliver robust performance through new investment strategies. Integrated AM firms will hence look for investing in other AM funds (e.g. funds of funds), develop long-term partnerships (e.g. seed money, incubator) and develop a network of small AM firms/boutiques. Independent AM firms should focus on product innovation and niche products

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