With fund supermarkets set to account for 25% of European mutual fund sales within five years, Charlie Upton asks whether the meteoric rise of the fund supermarket could sound the death knell for financial intermediaries
Investment Week 28 May 2001Recent findings and predictions by Cerulli Associates that fund supermarkets will account for 25% of net new inflow into the European fund market by 2005 should not come as a surprise. In the US, fund supermarkets have been up and running for several years and already have approximately 16% of market share. However, the question causing fear and consternation in broker circles is whether this growth will come at the expense of the traditional intermediary sector?
An often-touted argument is that growth in sales through fund supermarkets will destroy current channels of distribution and intermediaries will find elements of their core business disappearing overnight. After all, fund supermarkets offer lower initial and management charges, and a brave new Internet world has created an empowered consumer ' the bargain hunter dedicated to finding the best available deals.
Before such sweeping statements can be made gospel there are a number of questions that need to be addressed in defining the impact of fund supermarkets on UK intermediaries. First is whether growth in the financial services sector can support fund supermarket growth without crowding out existing intermediaries. Financial services spend is due to grow from £11.46bn in 2000 to £13.54bn in 2005 at constant prices, an 18% growth in real terms. The majority of this increased spend is through the emergence of 'new affluents', a demographic new to financial services seeking the type of low-charge investment offered by fund supermarkets.
However, new affluents are new consumers of financial services and will not crowd out existing client bases. If anything, their relative inexperience necessitates intermediary advice to distinguish the vast number of financial products and services available.
All of which leads us to whether fund supermarkets will fundamentally change underlying distribution of mutual funds? Although loud noises have been made regarding the projected market share of fund supermarkets, it can be argued that they simply represent another means of transacting mutual fund business. Since they allow business to be conducted over the Internet, regardless of the user's technical ability, they are arguably just as useful to intermediaries as to the directly transacting public. Therefore, intermediaries transacting may comprise a large percentage of total fund supermarket transactions. At Inter-Alliance, our practitioners can receive trail income from online transactions, thus benefiting from clients using our fund supermarket.
Of the two biggest fund supermarket players currently in UK, Fundsnetwork allows access to intermediaries and the public, while Cofunds is solely targeted at the intermediary market. A recent article suggested Legal & General was likely to adopt a dual access model as a result of intermediary pressure.
With the level of anticipated competition, it is unlikely many fund providers will want to restrict themselves to operating a solely consumer-facing fund supermarket, or exclusively signing up to such a platform, and in doing so alienate the intermediary market responsible for the majority of current sales.
The extent to which intermediaries choose to develop or integrate fund supermarkets into their own proposition is a strategic and marketing decision. However, if fund supermarkets are merely another channel for transacting business, be it on or offline, they pose no greater danger to intermediaries than current market conditions.
Although there is potentially a threat posed by new entrants, this is nothing new and something to which the intermediary market is well adapted. Of the new entrants, perhaps the most significant will be the online share dealing portals ' Charles Schwabb and TD Waterhouse have already stated their intent to develop fund supermarkets based on these. With recognised brands and client bases accustomed to using and buying investments over the Internet, they are in an enviable position. That said, the client bases of share dealing sites have been noted for their fickleness, switching between services in search of better charges and rates. Furthermore, the technology-led downturn in the markets have left many rethinking the wisdom of launching into online day trading without seeking professional advice first.
Both these latter points, client retention and the provision of advice, lead on to what is perhaps the greatest challenge, and consequently potential threat, for the intermediary. This is to use fund supermarkets to their advantage and add value to services offered to new and existing clients.
With a greater number of funds and fund managers available from one source, direct consumers are faced with greater choice. Choosing the right products consequently requires more advice from intermediaries. On the other side of the coin, the adviser has the benefit of being able to offer clients better choice of funds within one Isa or consolidated service.
The fact fund supermarkets are predominantly Internet-based provides intermediaries with greater opportunities to enhance the client-adviser relationship. As in the US, clients will, and already have, become increasingly able to do their own research online with websites dedicated to fund research. This will lead to better educated clients, but also ones with higher levels of expectation from their adviser. For an adviser, it will provide the opportunity to demonstrate their knowledge and value, rather than simply explaining how an Isa or unit trust works.
The argument that fund supermarkets and the Internet will undercut traditional intermediary business through discounts and offers to reinvest initial commission is also flawed. Typical initial commission from an Isa is not likely to generate an adviser anywhere near the amount of income that they believe appropriate for time spent with the client and processing the business. Furthermore, increasing competition, CAT standards and the 1% world mean that commission levels are likely to deteriorate further.
Rather than ruining intermediaries' livelihoods, fund supermarkets can significantly improve them. What could be easier for an adviser than to provide fee-based investment advice, then direct clients to fund supermarkets, on which the adviser is set up as the agent and can therefore view a consolidated picture of a client's transactions. By doing so, administration time is reduced and the adviser can concentrate on giving higher margin fee-based advice and providing a more proactive and higher quality service.
The threat for the intermediary is therefore not the competition fund supermarkets pose to existing business but rather the threat posed by not harnessing their immense benefits to provide an improved level of service. Becoming increasingly Internet literate, knowledgeable in fund selection and proactive in managing a client's portfolio will all be vital for the intermediary in dealing with increasingly product-savvy clients of today.
Just over 12 months ago, particularly gloomy commentators were booking the hearse for stockbrokers, convinced online share trading would tighten the noose on traditional traders.
A year later, we have several badly burnt day traders while most stockbrokers are still succeeding, adding online trading to their armoury of services. The industry adapted and evolved to the potential threat, eventually embracing online trading as a positive opportunity.
Ultimately, financial intermediaries must evolve with the rapidly developing financial services landscape of fund supermarkets, 1% charges and fee-based advice. The Internet is indelibly etched on the financial service marketplace and those who don't harness its power run the risk of facing smarter, more dynamic competitors who do.
In a sector where intermediaries have faced and overcome numerous challenges, it seems likely they will find supermarkets as complementary rather than competitive to their core business.
l Fund supermarkets to account for 25% of market by 2005.
l Fund supermarkets offer lower initial and management charges.
l Increased spend likely to be from new, not existing clients.
l Supermarkets should prove complementary rather than competitive to intermediary business.
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