steen steincke, head of global bancassurance at gartmore As most people in the industry are aware, ...
steen steincke, head of global bancassurance at gartmore
As most people in the industry are aware, after 2000's massive inflow of money into equity funds, 2001 was particularly disappointing, with net flows dropping sharply by around 80% in a number of European markets.
The response from European bancassurers, who already had the lion's share of European sales, was to protect their profit margins by concentrating on selling their proprietary products to clients rather than opening their distribution to third party products.
In addition, many European countries, notably France and Spain, either introduced, or are considering introducing, measures to curb the advance of cross-border suppliers.
That their customer base was ring-fenced extremely successfully is evidenced by the fact that European sales are totally dominated by domestic banks and insurance companies which now have around 85% of product distribution.
Their efforts were also supported by market conditions. Persistently weak equity markets meant even the best third party suppliers could only deliver absolute losses, so many investors turned back to their trusted domestic bank providers and away from the relatively unknown third party suppliers.
However, a survey by Sector Analysis found that although some data indicated open architecture had recently shrunk, there was a more positive attitude towards its future. Indeed the use of third party funds was expected to increase by a hefty 18% in 2003 after only an 8% rise in 2002. This is an expectation that we share.
Nonetheless, we foresee a marked change in the shape of open architecture. The term is intended to indicate choice for the consumer - but how much choice? The 2001 Zurich conference on Open Architecture defined it as a broad choice of third party fund suppliers, namely 10 to 49.
Using that definition, Sector Analysis' survey shows a slight decline from 2002 to 2003. What we believe is more interesting, though, is that the number of providers offering less than five third party suppliers has increased. This model has come to be known as 'guided' architecture.
While the fund supermarkets on offer from many US providers may take the lead in fully open architecture, we believe the events of the past few years will tend to promote the use of guided architecture for the foreseeable future as bancassurers focus on offering only the highest quality products to their clients.
The vast potential for open architecture to expand in Europe is illustrated by a brief comparison with the US, where mutual funds account for 70% of the market. And in our view, the fact that European investors have become more educated and knowledgeable over the past few years is yet another factor propelling the expansion of open architecture.
However, investors have not yet shed their dependency on the traditional bancassurance industry. It is clear that many clients want advice rather than endless choice and would prefer to rely on their bank's expertise in choosing a select number of third party suppliers for them to consider.
In this environment, competition for the European sales market among cross-border third party suppliers is likely to be intense. Those wishing to be chosen as key fund suppliers to domestic providers will have to demonstrate excellence in terms of performance, quality of research, support and sales service and provision of specialist products.
Only in this way, can they ensure their participation in what we believe will be a most important stage in the evolution of the European investment market.
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