For the last few years, the global asset management industry has seen increasingly blurry lines of demarcation in key business areas previously treated as silos.
– On the product side, alternatives and traditional investments have been converging, both for individual investors and institutions;
– Geographically, competition between fast growing/emerging and developed markets has altered the competitive landscape;
– In distribution, the convergence of retail and institutional approaches with global financial institutions as powerful hybrids and gateways to either channel is creating an inflection point for the industry, impacting business models and brands.
– Lastly, we see a growing connectivity and impact of local and global regulation, enabling some firms to corner markets, while overall raising the operational costs for the global investment management industry.
Each of these metatrends alone is creating greater complexities for fund managers and how they grow their business – in combination, they represent an inflection point for the industry from an era of self-directed performance driven investing seen as fun, to an era of advisory-based investing around managing complexity and volatility, while preserving capital and providing stability and income.
I dubbed those four metatrends “multi-convergence” (MC), visually depicted above. Beyond the quantitative evidence of those trends from Strategic Insight’s global databases, over a thousand interviews and surveys with asset holders worldwide post-crisis reinforced the acceleration of MC.
Regulation in the spotlight for global asset management
Regulatory changes in particular have been in the spotlight in recent years, and CEOs worldwide are seeing over-regulation as the key impediment to industry recovery and growth. And indeed, a cursory look around the world shows a variety of scandals and subsequent regulatory initiatives, e.g.:
– Hong Kong: accumulator and Lehman minibond scandals shift the balance between offshore and onshore vehicles; regulation fundamentally changes local sales practices;
– Chile: regulators following the local La Polar scandal disapprove Dublin UCITS in pension funds, shaking up a 30-year offshore fund business;
– India: SEBI in 2009 bans front-end load fees and over night changes the dynamics and business models for asset managers in the country;
– UK: wide ranging overhaul of the local fund industry with implementation of the retail distribution review (RDR);
– US: Fatca as part of the IRS’ efforts to crack down on tax evasion is costing investment managers huge amounts of money globally;
– Australia: waiting on the outcome of Future of Financial Advice (FOFA) and Stronger Super reforms;
– Europe: a mix of regulatory efforts including UCITS, AIFMD, PRIPS, Mifid, Basel, and more, is impacting both the region and the global cross-border business.
Strategic Insight has commented on these development in detail across numerous reports, books and case studies. Among them:
– Australia’s Fund Managers Look To The Future, analyzing Australia’s two major reforms;
– Building Bridges: Views from the leading regional institutions and distributors on how to build a successful Asia Pacific asset management business, focusing on distribution in different markets in Asia;
– State of the Asset Management Industry: Latin America, covering opportunities and developments in major Latin America markets along with Chile’s regulatory efforts and Brazil’s multi-mercado hedge fund business as case studies;
– Quo Vadis UCITS? The 25th Anniversary of an Increasingly Global Brand, an opinion piece co-written with former EFAMA president Jean-Baptiste de Franssu.
I also had the pleasure to be part of a CEPS (Center for European Policy Studies) task force chaired by J-B de Franssu in 2011. The task force published a 200+ page paper, Rethinking Asset Management: From Financial Stability to Investor Protection and Economic Growth, authored by Mirzha de Manuel and Karel Lannoo.
Last month, I was able to catch up with de Franssu at AI/SI’s CEO dinner in London, where our conversation largely focused on investor protection.
Highlighted below are some of de Franssu’s important thoughts on investor protection in Europe and how to address the regulatory challenges for the industry:
Investor protection has been the rallying call of regulators and policymakers since the financial crisis took hold. Failure to strengthen protection for investors will hamper economic growth dramatically, but so far most initiatives have missed the mark. In taking an approach mainly based on prudential regulation, and without fixing the day-to-day practical inefficiencies of the saving products market, the regulators and legislators risk addressing only part of the issue, and, worse, confusing the investors it is trying to protect.
In Europe, the Commission is drafting a set of regulations around investor protection.
Some, such as MiFID II, are advanced; others, however, are in an early stage, such as legislation relating to Packaged Retail Investment Products (PRIPs) and the Insurance Mediation Directive (IMD). We are told these different initiatives should take a harmonized view of relationships between providers, distributors, advisors and investors, to give investors the right balance of protection.
The reality is that the initiative overall has adopted a protracted piecemeal approach. Thus, for the foreseeable future protection and transparency rules will vary depending on both the product and the distribution channel an investor chooses. This patchwork structure will encourage regulatory arbitrage: the most transparent channels and products will be the most disadvantaged. This is hardly in line with fair competition ideals.
So what is the alternative?
The MiFID II proposals seek to address investor protection issues for some financial instruments by supplementing the existing regulatory framework of MiFID I. But current MiFID I already includes provisions which could significantly improve investor protection.
Sadly, these are not uniformly enforced across the EU and apply only to MiFID regulated products. Before establishing additional regulations, it would make sense to implement MiFID’s existing provisions effectively, especially when we are told that drafting new regulations is consuming Commission resources.
Additionally, more must be done to improve the relationship between investors and their advisors and providers. The Commission has focused on disclosure and inducements in MiFID II. It should take a broader approach embracing the definition of advice (and of independence), sales force training and qualification, and the product launch process.
When it comes to inducements, a full ban may not be the most efficient approach. Rather, hard disclosure at the point of sale and throughout the duration of the relationship between the product provider and the client may be more appropriate to ensure development of advice and of open architecture, as well as multiple choices for retail investors.
These ideas also need to extend into PRIPs to identify all products that should be regulated, as well as their distribution mechanisms, to ensure a level playing field.
Ultimately investors should be able to choose the product, advice model and cost structure that suits them best.
To do this they need to understand the options available, the product risk/reward profiles, and their potential outcomes.
Some retail investors might view derivatives with a negative connotation, but when used correctly they can deliver good results. They must, however, be explained and sold in a way that is transparent and competitive.
This new regulatory framework should also focus on governance standards for all PRIPs providers, to ensure best practice in product design, supervision, marketing and distribution across the single market.
All financial advisors, distributors and intermediaries should also be qualified to sell PRIPs via a Europe-wide certification regime. This, together with common disclosure standards (which must cover the total cost of investment), is fundamental to encourage investors to come back into the market. In the long-term, financial education is essential because no regulation can adequately address retail investors’ lack of knowledge.
We need investors to fund growth projects that bring benefits to the real economy and to secure their own long-term financial future.
Yet, the regulatory framework being devised today will neither bring investors back, nor adequately protect those that do return. Indeed, it risks adding costs through an overly complex set of mismatched rules that are limited to a few narrow initiatives.
Moreover, failing to act now is generating uncoordinated initiatives by individual European member states. The best example is the Retail Distribution Review in the UK as well as its equivalent in the Netherlands. So a dialogue with all relevant stakeholders to put forward proposals to align the regulation of financial instruments and insurance products must be enabled.
It would be refreshing to see the views of pan-European policymakers, regulators, PRIP providers, distributors and investor associations coalesce into a single investor protection blueprint. The resulting regulatory initiatives could go well beyond provisions contained in the current draft of MiFID II, and respond to the long-term need for a level playing field of investor protection that any fully functioning savings market requires.
Such a move would also demonstrate to European citizens that it is Brussels’ ambition to draw lessons from the financial crisis that go beyond addressing systemic risk issues, delivering concrete tangible improvements to their daily lives.