Retail funds face a digital threat
The investment fund industry is facing a potential “Kodak moment” of challenge from digital alternatives. These new options are attractive to use and give the retail client a greater feeling of control. As well as describing the threat, the “Reimagining Fund Distribution” discussion highlighted how the asset management industry can react.
A strong sector that still fails to fully convince
“There’s not anything fundamentally wrong with the fund industry, but it faces a point of inflection,” said Chris Chancellor, senior director of technology company Broadridge. “Whilst we've got €13trn assets in the European fund industry, most people in Europe do not invest in funds, preferring low yield bank accounts,” he added. To add another data-point to this frequently remarked phenomenon, he cited the UK example during Covid, which has seen a £200bn increase in saving of which only £1bn has ended up in funds.
Clients increasingly want control & choice
Shaking up this scenario will be “the biggest transfer of wealth we've ever seen, with assets going from baby boomers down to a much younger generation.” This new cohort are digital natives and potentially they are “going to be looking for a completely different technology solution,” said John Herlihy, chairman of third party management company Carne.
Even without this change, the pandemic has shown how older generations have adapted to new technology he added. For example, trading site Robin Hood has nearly doubled the number of accounts in the last two years. “These applications offer a range of choices and are well designed, resembling other technologies that users are familiar with,” he said.
Transparency in demand
Transparency – investors knowing where their money is being invested – has been a long-standing client request, and “ESG is putting rocket boosters under that,” said Mr Chancellor. Moreover “educated people want information in real time, as they're thinking about where they want to invest,” he added, saying that analytics tools add to this experience. Funds hear these requests, but are reluctant to divulge their asset allocation strategy as this is the key value added by active managers.
The Kodak moment
Faced with these challenges, Mr Chancellor is concerned that the industry is looking in the wrong place. “It's like a Kodak moment for the industry,” he said, alluding to the company that was blindsided as it continued to focus on improving its film, while ignoring the arrival of digital. The fund industry likewise often focuses on the competition from peers, but it is new disruptive digital players that should be attracting equal attention.
Listening to each client
Micro market segmentation adds to the consumer experience, as it enables clients to be treated with greater personalisation. For example, a young client who has specific investment requirements but just a few thousand to invest at the moment is potentially tomorrow’s long-term, lucrative client. If they can be treated well now this would increase their understanding of the fund concept and could lead to long term brand loyalty.
There is growing interest for thematic funds that offer exposure to certain economic sectors, even if these strategies have their critics. “Telling a story is really important. People buy stories, they don't buy facts, figures and performance numbers,” said Mr Chancellor. Direct indexing is another similar trend, whereby investors can select stocks from a list on an index.
Start the journey
Ultimately the pair are convinced that funds give clients the best investment options, as they “offer better returns and security than superficially attractive options like trading or crypto,” said Mr Herlihy. Hence asset managers must work harder to offer clients what they want. “There won’t be a Kodak moment overnight because funds have assets and revenue, so there’s time to change, but the industry has to start that journey,” said Mr Chancellor.