RETHINKING DISTRIBUTION

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Change in investor trust and loyalty patterns While investors are puttingmoney back into investment funds, the recent financial crisis has damaged distributor and adviser reputation. The loss of investors’ trust and loyalty stems from various factors. These include lack of transparency, performance and cost. Lack of transparency (e.g. risk disclosures) has been one of themajor causes now being addressed by the regulator, however the industry will need to work on consistent low performance and high costs for investors in order to regain their trust. In the post-Madoff environment, investors are still concerned about trustworthiness, which remains the most important factor in choosing an adviser. A PwC/UCL survey of retail investors in 2009 showed that only 20% of investors were satisfied with their financial advisers (see figure 6). Distributors and advisers are now spending more time with clients explaining their investment choices and showing them information about the funds. As distributors and advisers strive not to push products, some investors still perceive them as not much different from salesmen. However, a trust deficit does not necessarily lead to investors switching their providers, as shown by Eurobarometer [8] : “While only 13% of EU consumers switched their providers for savings and investment products, only 35% of the ones who did not switch believed their current bank was providing good value for money”.

Prime relationships

Today, fund distributors and advisers have a significant negotiation power towards fund managers. This is evidenced by the fact that fundmanagers have to give between 40% and 60%of their management fees to distributors and advisers due to their prime relationships with an often captive clientele. With increasing pressure from regulators and investors for transparency, especially on costs and conflicts of interest, the future of prime relationships will depend on how loyal investors will remain towards their distributor and adviser.

Figure 6

Trust deficit of financial advisers. Are you satisfied with your financial adviser(s)?

Strongly agree; 9%

Strongly disagree; 10%

Disagree; 14%

Neutral; 47%

Agree; 20%

[8] European Commission, Eurobarometer, Consumers’views on switching service providers, Analytical Report, January 2009

Source : PwC/UCL Retail Investor survey 2009

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