Heavyweights such as Old Mutual and Bristol & West already have a big presence on the web. So how can fund supermarkets succeed in grabbing lucrative market share from such established players?
Two years ago, the growth of internet-based financial services seemed almost inexorable. Virtually all the main banks in the UK offered internet banking facilities, and simple general and life insurance products were starting to become widely available over the web. New entrants such as Egg and Interactive Investor had gained a strong market position in the UK, but established brands were catching up quickly. As the market matured, the first mover window closed.
With that maturity came the realisation that setting up a comprehensive internet service was a huge undertaking. Launch costs were high and it became clear the most optimistic growth forecasts were unlikely to be met. The cutbacks at the beginning of this year were inevitable, and general investment in standalone 'clicks-only' internet initiatives virtually ceased. Leading retail banks such as ABN Amro and Lloyds TSB scrapped plans to launch standalone personal finance portals.
We also saw the rationalisation of existing operations, with direct brokers such as Charles Schwab and CSFBDirect making deep cuts in their workforces. This repositioning raises a number of important questions. Is it sensible to invest more money in trying to distribute retail products in volume over the internet? Why are many institutions such as AMP, Old Mutual and Bristol & West continuing to invest in this area and, in particular, why should funds supermarkets succeed in taking market share from traditional channels?
To answer these questions we need to look at distribution costs, service differentiation and the difficulties of scaling up traditional channels. We can all see that in a bear market it is increasingly important to reduce client servicing and distribution costs and improve adviser productivity. Cost dynamics still strongly favour internet channels. This is true in both B2C and B2B where, for example, an internet-based service channel can sharply reduce an adviser's client servicing costs.
The development of fund supermarkets in the UK has to date been predicated on the potential low-cost distribution capabilities of the internet.
A fund supermarket also potentially offers many benefits in delivering information and advice to customers at low cost. It can be an important way of differentiating a service in today's crowded market, either as a new direct channel or to enhance an existing 'bricks' based adviser network. Egg, for example, is able to combine its high-interest savings account with tailored unit trust portfolios in a single offer.
A comparison of the ease of scaling up a fund supermarket with the difficulties involved in acquiring or expanding traditional adviser channels offers an explanation of the potential success of fund supermarkets. By design, internet technology is extremely flexible. Once in place, it can be scaled up very quickly to meet increased demand.
From the perspective of the customer, the fund supermarket offers many clear benefits. Commissions and switching costs are reduced; high-quality product information and comparatives are more accessible; complete portfolios can be tracked closely through a single web site. It is these benefits that will help to contribute to the long-term survival of the fund supermarket concept.
Across Europe, mutual fund supermarkets are still seen as a compelling proposition (see table). These forecasts anticipate a much higher level of integration between the fund supermarkets and financial advisers.
This is already beginning to happen in the US and Canada where the larger firms of financial advisers are working hard to integrate their e-channels with their existing adviser networks, combining the best of both worlds.
If you accept these conclusions, how can you get into the race without spending too much money? Can you benefit from the experience of others in taking shortcuts, ensuring that your new supermarket is up and running quickly?
The first step is clearly to work out what developments are needed. A true fund supermarket consists of a web front-end, an online portfolio management system and a settlement and administrative back office. Through such a channel you could offer on-line fund selection, dealing, valuations and cash management. Almost certainly you also need to bundle in other services such as a library of fund information, an investment risk assessment tool, and so on. For a direct B2C site, the normal practice is to then group these services into a sequence of zones, corresponding to different levels of subscription. This already looks challenging, but when we start to consider issues such as Pep conversions, switches and tax processing, the real operational complexities of the supermarket become clear. The main daily process in your supermarket will be the aggregation and placing of deals for each fund.
It is clear that setting up and running the supermarket is not an easy undertaking. Large organisations typically spend £10m-£50m on such a project. They can rely heavily on third-party administration (TPA) providers which have developed services specifically for funds supermarkets. Without a TPA, the costs could escalate significantly, yet at the other end of the spectrum, a medium-sized intermediary could hook into an existing service for a fraction of the cost.
There are many complexities in such a project, and many steps a smaller organisation can take to minimise these costs. In particular, it is necessary to consider the three key areas of defining the customer value proposition (CVP), selecting a TPA and managing the technology development.
The CVP is important because much of what follows in developing the infrastructure of the supermarket is driven by the offer you are making to the customer, for example, the marketing plan, IT architecture and operations design. It is vital to be clear about the terms of that offer and why it will be attractive to customers. Market research into customer needs is an essential first step, but we have found that specific dedicated research which tests all aspects of the CVP in the target market segments is much more useful than general research into consumer attitudes. Many so-called 'features' can actually put off customers in your target group altogether, so you can save money by concentrating on the most valuable functions in the supermarket and eliminating the rest.
The next most important step is to select the right TPA. There are several organisations currently offering TPA services for funds supermarkets in the UK. All offer comparative advantages and disadvantages and all are looking to aggressively expand their business in this area. Making a choice is therefore not easy. Some TPAs offer a complete turnkey solution, including 'white label' web screens that can be branded however you choose. Others offer existing relationships and pre-agreed discount structures with the fund providers so that you can ride on the back of their existing business. Three vital considerations in selecting the right TPA are:
• Strategic fit: The overall strategic direction of the TPA, its knowledge of the target markets, the commitment of its shareholders and any potential conflicts with existing clients.
• Systems functionality: How closely does the TPA's systems fit your functional needs? Which products can it support (Oeics, for example), and can it offer integrated call centre support?
• Web integration: Are its systems built for straight-through processing? Can it offer high-performance links between the client portfolio system and the web server? How does its security model work?
Managing the technology implementation is important and there are several steps to consider. You need to strike the right balance between the functional requirements and the visual design. The web site designers must take the functional needs into account and avoid the terrible temptation to produce a visually attractive site that is irksome and slow to use. Time needs to be set aside specifically for managing your development partners, staying involved and making sure they deliver what you need. And adequate time must be allowed in the plan for testing and fixing bugs. A full supermarket web site is a complex application and the testing takes more time than you may think.
So will funds supermarkets be successful in the UK? We believe they will ' if they can meet consumer needs and operate at low costs. However, it is unlikely that the market will sustain a large number of players. Common opinion suggests that about six fund supermarkets will dominate the market. Therefore, if you are considering launching a fund supermarket you need to be sure to build and maintain a sustainable proposition.
A funds supermarket potentially offers benefits in supplying information and advice to clients at a lower cost than traditional channels.
Web site design and planning needs to be carefully thought out.
Defining a clear CVP is crucial.
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