Fund supermarkets can give advisers more time to spend with their existing clients, as well as take on new ones, by removing some of the burden of administration, says Ruth Clarke
Fund supermarkets have officially arrived in the UK and their very real emergence over the past year as a significant distribution channel is already changing the way business is transacted. According to research company Cerulli Associates, it is estimated that by 2004, the related benefits of fund supermarkets will lead to 25% of all new unit trust business being accounted for by this distribution channel, with intermediaries accounting for 65% of the market. Fund supermarkets are already well established in the US and as the public desire for a 'world of convenience' continues, the UK has embraced this latest development.
To give an idea of the impact of fund supermarkets on the adviser market in the US, they are credited with quadrupling the amount of mutual fund business written by independent advisers. By embracing the concept of the supermarket, advisers freed themselves from the burden of administration and client record keeping, giving them more time to spend with their existing clients, as well as take on new ones. Typically, this led to a doubling of the number of clients per adviser and, equally importantly, a twofold increase in assets under management per client.
So against this background of dramatic growth of the mutual fund industry in the US, it was inevitable that a number of competing supermarkets would be launched in the UK ' each with its own defining characteristics. With a variety of fund supermarkets from which to choose, each offering a different combination of options, funds, products and groups, the intermediary will clearly be expected to recommend the best choice available to their clients. Yet even now, confusion still abounds as to the exact nature of the fund supermarket and the benefits awaiting customers and intermediaries. Many consumers wrongly suppose that a supermarket only exists online. Yet the reality is that online is only one form of access and a supermarket should be accessible in a way that meets the needs and desires of its users.
One thing is clear however: to gain the maximum benefit from this development, whichever model is chosen, it must empower the adviser. Looking at the options available, three different models have emerged.
First, there are those focused exclusively on the direct to consumer market, offering products and funds at discounted prices, such as Egg, Ample and Virgin. This model is known as the B2C model and could be seen as a potential threat to intermediary businesses.
However as it relies on attracting those customers who are confident enough to take control of their own financial needs, then the threat can be quantified. Indeed, if the US experience is repeated in the UK, then these direct consumers will gravitate towards intermediaries as their needs become more complex, and they have less time to devote to their financial affairs.
Second, there is a 'hybrid' model that has both a direct and intermediary offering, and where the supermarket itself is responsible for setting the price and terms on which business is transacted, even for intermediaries.
The third version is the pure B2B model, such as Cofunds, which is aimed exclusively at the intermediary market and acts as the intermediaries' intermediary, providing record-keeping and consolidation services for intermediaries and their clients.
But before considering which model to go for, one of the first questions an intermediary should ask, is what the potential benefits are to themselves and their clients.
There are tangible benefits of convenience that link all current models of fund supermarkets, including:
Consolidated information and administration, which will not only deliver an enhanced service for clients but also ease the day to day management of business.
The need to carry only one suite of literature, including Key Features.
A comprehensive range of products, managers and funds, all in one place, to enhance the portfolio planning process.
Value for money and real cost benefits.
A choice of access points.
Having made the decision to use a supermarket, there are some very real and fundamental issues making it essential that an intermediary understands the scope and nature of each one on offer.
First, it is most important to consider if the fund supermarket is independent or owned and promoted by a single provider. If the supermarket provider is a single company it will empower one particular product provider, with the intermediaries' brand and positioning potentially at risk. A truly independent model empowers all participating parties, intermediaries and fund managers alike, and does not have a competing offering.
Second, one should look at the original design of the model and at whom it is designed to benefit. Intermediaries need to know that the fund supermarket they choose will not deal directly with customers, so there is no danger of their clients dealing with the provider directly. Intermediaries should be able to stake their claim to this market without sacrificing their traditional core strength ' their client relationship. The hybrid supermarket model, with its discounted direct element, must surely test this relationship. In contrast, the independent model is motivated purely to ensure the growth and continuing success of the intermediary market.
Furthermore, if a supermarket really is to make a major difference to intermediary/client record keeping, then it must deliver accurate, timely client information to enhance client service and maximise the benefit to both intermediary and client.
Taking into account the amount of information available to any supermarket provider, it is essential to intermediaries and providers alike that this information is treated in confidence and respected. US experience tells us this is a very real issue that must not be ignored.
Finally, what is the flexibility and future direction of the supermarket? Any fund supermarket must offer choice and added value, but flexibility and simplicity are also critical. The supermarket's role in the investment process should be clearly understood by the client to avoid confusion. Equally, intermediaries and providers must be free to agree terms between themselves and an intermediary must not feel constrained about the choice available. While it is obviously not essential to offer every fund from every provider, the supermarket must offer a wide choice of funds and groups so that an intermediary can create a portfolio of choice for clients, and then change that portfolio if required.
Pricing is also an issue. The supermarket should not impose an additional cost into the investment transaction: a number of supermarkets in the intermediary arena either impose additional costs or operate a complex pricing structure that is difficult to explain and may serve to dissuade an investor.
Undoubtedly though, fund supermarkets offer a compelling proposition, removing the burden of administration and empowering the intermediary to optimise the service they provide to their clients. As long as the fund supermarket is independent, does not seek to change the intermediary's business, and aims only to leverage the latest technology to benefit intermediary and client alike, fund supermarkets will allow intermediaries to compete efficiently with direct providers, grow their businesses and deliver advice, choice and value.
Fund supermarkets can provide consolidated information and administration.
Intermediaries should consider whether supermarket is independent or owned by single provider.
In US, supermarkets are credited with quadrupling the mutual fund business written by advisers.
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