Rising threat

From Archive 02 December 2002

By PWM Editor

Roxane McMeeken investigates how banks and advisers can fight back against the distribution threat posed by the success of fund supermarkets.

With the fund supermarket concept in the ascendancy, can banks and other distribution channels compete with this ultimate armchair self-selection model? How can traditional distributors adapt to the threat posed by new technology?

On the face of it, banks, insurance companies and independent financial advisers appear to be in danger of being made obsolete by leading fund supermarkets.

A handful of these electronic finance retailers are already making a name for themselves around Europe. In Germany, ADIG’s e-base, a subsidiary of Commerzbank, and Gothaer FondsStation are key players. France has Cortal, owned by BNP Paribas, and Vega Finance, owned by CDC; while the UK boasts Fidelity’s Funds Network and Cofunds, collectively owned by Gartmore, Jupiter, M&G and Threadneedle.

Commentators claim that in five years there will be only one or two fund supermarkets left in each European country. This will be followed by the consolidation of a single platform for pan-European trades.

The weeding out seems likely to take place in Germany and the UK first, since each country has more than eight supermarkets.

In France, by contrast, the fund supermarket industry is less advanced, with only two main platforms, so consolidation is expected to come later.

KPMG defines fund supermarkets as “platforms that support investors and fund distributors in:

selecting funds from various providers

processing fund transactions

reporting (balances, transactions, fees).”

Eric Macy at Brown Brothers Harriman (BBH), a US service provider making itself known in Europe, explains how the concept was born: “In the US in the 1980s, local customers were only being offered proprietary funds. As a result, first, funds supermarkets were created and second, people split off from banks, set themselves up as independent financial advisers, and the banks lost customers.”

So it might be thought that supermarkets pose a threat to the traditional distributors of funds in Europe. Why should investors bother going to these commission-hungry middlemen when they could instead go online and invest directly in any fund they like?

One reason is that customers still want advice, rather than just straight access to funds. But fund supermarkets are increasingly getting this covered. Cofunds, for example, has built in facilities for portfolio analysis, which can compare the performance of funds and asset allocation strategies.

For the banks, according to Mr Macy, there is only one thing for it: “If you can’t beat them, join them”. BBH has put together a range of products that effectively allow banks to act as fund supermarkets, offering their clients 500 funds, run by 65 different fund management houses.

The WorldView suite includes technology to analyse funds, to buy them on an STP basis and handle the administration and custody. This year, BBH has signed up 25 European banks to this service and is confident of getting 300 on board within five years.

“Banks will end up with something that looks like a supermarket model,” agrees Phil Wise, chief executive of EMX, a provider of back-office technology to UK fund distributors. But he adds that banks will not necessarily have to surrender their brand names under open architecture.

In the UK, a number of financial institutions, including the Nationwide Building Society, sell unit trusts branded with their own name, which are in fact run by other companies, says Mr Wise.

Schroders Private Bank in London recently signed a deal to offer its clients Frank Russell’s multi-manager funds. Schroder’s executive director Mr Robinson says the bank recognised the need to offer clients “access to the best fund managers around the world”.

But banks must make a stronger commitment to selling a broader range of funds as clients become more educated, argues Valérie Meurice, head of marketing and communications at BNP Paribas Asset Management in Paris.

“Two years ago, clients were coming to us and asking for value funds. We are not a value manager, so we had to start offering other managers’ products,” she says. “The trend is that it will be necessary for all distributors to offer any fund in any style. You need to pick the best funds to complete your offering.”

Ms Meurice agrees that there is a demand for advice as well as just access to funds. She says that “six thousand funds (the average offered by fund supermarkets) really is a nightmare for distributors who may not be specialists”.

BNP has therefore launched ParSelect, a B2B site offering 200 hand-picked funds and plenty of advice.

While independent financial advisers already claim to work on an “open architecture” basis, offering non-proprietary products, it seems they will have to work with fund supermarkets in order to offer the huge range of funds that customers will demand.

Mark Lund, chief executive of JPMorgan FundsHub, which provides the technology for Germany’s Gothaer FondsStation, stresses that advisers should work with fund supermarkets rather than see them as a threat.

“They allow advisers to do one of three things,” says Mr Lund, “spend more time getting to know clients, spend more time servicing clients and spend more time on the golf course.”

Advisers actually stand to benefit from fund supermarkets according to Rudolf Siebel, deputy managing director of the German investment management association, the BVI. “Supermarkets are a must for any independent financial adviser who wants to give consolidated reporting on a number of different fund providers. The platforms allow them to keep accounts smoothly and to get good prices for their customers.”

However, how useful fund supermarkets are to advisers in this way will determine how much they are used. This, in turn, will determine whether they stay in business. Industry experts anticipate widespread consolidation among Europe’s fund supermarkets. In the US two fund supermarkets have prevailed, run by Fidelity and Charles Schwab.

The reason for this is that customers still want face-to-face advice, according to JPMorgan’s Mr Lund. He argues that this need for advice will not go away and it guarantees that fund supermarkets will not take over the entire retail and high net worth investment industry.

“The decision about which ISA (UK individual savings account) to buy is a tricky one, for example. There’s an enormous choice and you only have past performance to go on,” says Mr Lund. And the conditions are right for the demand for advice to grow: “You can’t rely on the state to support you in your old age anymore, people are living longer and employer pension plans are poor,” says Mr Lund. “Leaving your money in the bank is no good, as interest rates are so low.”

As a consequence, “even though individual investors aren’t very active at the moment, it is inevitable that more people are going to be buying investment funds. If they don’t, they’ll have nothing to retire on.”

This doesn’t mean banks and advisers can sit back and relax. As clients become better informed and more concerned about their retirement savings, they are demanding access to an ever-enlarging array of investment products.

So in order to survive in the future, banks and advisers will have to embrace open architecture. Fund supermarkets, meanwhile, will be more likely to survive if they offer additional services, such as investment analysis tools, thus either helping advisers or encroaching on their territory, depending on your view.

Shopping list

Mark Lund of JPMorgan FundsHub has three tips for fund supermarkets fighting to gain a significant market share:

1 Drop the old idea of operating solely on a B2C (business to customer) basis. This is because not enough individual investors are confident to buy funds on their own, without advice. Indeed, the two US survivors are both B2C and B2B. So supermarkets need to attract the “business users” – in other words, the advisers, banks and insurance companies. To do this, supermarkets must become more than mere channels offering access to a range of funds.

2 Offer integration with existing distribution channels, an online transaction capability, customer administration and record keeping, as well as a range of information tools to help users assess investment products and portfolios. This means investors get faster access to products, distributors get to offer a cheaper and more professional service and fund managers replace numerous small retail orders with aggregated institutional orders, removing administrative burden and lowering costs.

3 Diversify product ranges to include, for example, life and pensions, direct securities dealing and offshore investments. Mr Lund says: “Retail investors may have a limited appetite for an online distributor who merely sells a range of mutual funds”.