Over the last two years, the UK financial services industry has undergone a fundamental change with ...
Over the last two years, the UK financial services industry has undergone a fundamental change with the emergence of a new communication and distribution channel, the internet. Given its ability to deliver detailed financial information along with transaction capabilities, the internet has enabled consumers to carry out a range of financial services that were previously difficult or even impossible to do direct.
A realisation is sweeping through the financial services industry that the internet is transforming the entire landscape of UK retail financial services. A survey carried out by the UK Government has confirmed that over the period July to September 2000 alone, an average of 7.8 million households in the UK could access the internet from home. This amounts to nearly a third (32%) of all UK households.
As usage and familiarity increases, trends indicate that consumers will increasingly turn to the internet for researching and undertaking financial transactions. This claim is supported by Forrester Research, which estimates that over 3.5m UK adults now use the web to support their financial decisions. Long gone are the days when the internet was simply used as a means for consumers to obtain basic information from websites that were simply an extension of a company's existing brochure.
The impact of the internet has been particularly evident in the UK fund industry, with the launch of the first fund supermarkets in March last year. Since the launch of this concept in the UK, industry commentators have heralded a new dawn for private investors, manufacturers and retailers alike.
However, confusion still exists over the exact nature of fund supermarkets and how they will impact upon the industry over the long term. In order to assess the potential impact of fund supermarkets in the UK, it is wise to first examine the US where the fund supermarket concept was originally pioneered by Charles Schwab more than a decade ago. In the US, the impact of fund supermarkets has been significant. Today, some 15% of all mutual fund investment is now carried out online, front-end charges have all but disappeared, and financial advisers predominately charge a performance-based advisory fee for their services.
This is not yet the case in the UK, where turnover from fund supermarkets remains quite low, front-end charges continue to be levied on many funds and the majority of tied and independent financial advisers still rely on commission. However, through a combination of technological advances, new legislation such as Stakeholder, and increased consumer awareness and demand, we expect there to be a profound and significant shift towards the US-style environment for IFAs within the next three years.
So, how quickly will US-style fund supermarkets begin to affect the UK market? With an opportunity to learn from the US, supermarkets promise rapid growth and penetration of the UK financial market. As an indication of the speed and scale of this growth, research company Cerulli Associates estimates that, within the next three to four years, fund supermarkets will account for up to 40% of new UK authorised investment market, with financial intermediaries potentially accounting for up to 60% of this market. In addition, it is worth noting that Cerulli estimate that the UK authorised funds market place is expected to grow from more than £265bn today to £555bn by 2004.
For many commentators, the threat to financial intermediaries from the internet is clear. Increased information, lower costs, and ease of trading will inevitably lead to an increase in direct investment, allowing the investor to bypass the professional adviser. However, far from reducing the need for advice, increasing levels of information and investment possibilities available via the internet will enhance the need for professional guidance and independent financial advice.
There is no doubt that fund supermarkets facilitate research and straight through processing, allowing consumers and intermediaries to clear, settle and manage funds at the click of a button. However, financial planning is essentially a human process. The increasing number of asset categories and individual funds will further cement the need for tailored guidance in the new fund supermarket environment.
Even self-directed investors will reach a point where the choice may be considered too much and their assets under management will become uncomfortable to manage without professional advice. According to Cerulli Associates, the threshold where consumers actively seek advice in the US is approximately $100,000.
It is too early to say what these thresholds are in the UK, although, as our experience indicates they do already exist. Inter-Alliance offers consumers access to approximately 5,000 funds from over 400 fund managers via the web, 700 of which can be transacted on-line using a debit card. Our experience supports the consumer's need for one to one advice as many investors who purchased funds on-line have done so after seeking advice from an IFA.
Trends clearly indicate that although supermarkets will increase the level of direct investment, investors will continue to seek advice when planning for their long-term future. At Inter-Alliance we have found that the key reasons our customers continue to use advisers as well as the internet are trust, validation of their decision, and more importantly the availability of tailored face to face advice.
Since the launch of the fund supermarket in the UK, we have seen the emergence of four distinct but occasionally overlapping models. The first is Online Fund Supermarket white label operators, which operate solely on a business to business to consumer (b2b2c) model. These companies predo
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