Rethinking Distribution

Creating competitive advantage in a new fund distribution paradigm

June 2011

2

Rethinking

Distribution

3

PwC Luxembourg

For the third consecutive year we are proud to partner with CACEIS

to examine the future of our industry within the context of the

major trends which are currently asserting themselves.

When our industry faces such a maelstrom of change, it is not

enough to simply react. We must take the time to actively

consider what our future may hold in store. We must exercise our

imagination and combine it with our knowledge of the industry

as it stands to make informed assumptions that will allow us to

more effectively weigh the value of our longer term objectives.

It is not an easy task. With such an array of forces affecting our

industry – an industry which is itself complex and sophisticated

– it would be tempting to adopt a ‘wait and see’ approach. In this

report we have tried to resist this temptation.

Although nobody can predict the future of fund distribution, we

do have broad trends that can guide us. Utilising these trends, we

have defined a number of potential scenarios for the next five to

ten years. Some will materialise, some will not. The value of each

scenario lies in the critique that we can individually bring to it after

considering the factors involved and weighing the arguments

objectively. This will certainly help the reader to navigate through

uncertain times.

We trust you will find this report useful, informative and most of

all, thought provoking. We hope that you will contribute to the

debate at www.rethinkingdistribution.com and we look forward

to discussing your views in the future.

CACEIS Investor Services

With today’s increasingly globalised economy and the emergence

of new economic and political powers, the long-term ramifications

of any global crisis can only be more pronounced. However,

despite the coordinated intervention of global institutions, which

seem to be steering the financial industry on a more stable course,

the true and enduring consequences of the crisis remain less

than clear.

CACEIS, in association with our long-term research partner, PwC

Luxembourg, have undertaken to analyse the growing field of

international fund distribution, identifying the drivers of change

and speculating on the possible outcomes in this post-crisis

environment. We sought to focus research efforts on a limited

number of the most common scenarios faced by industry players.

And for each scenario, we have determined the most probable

direction of distribution developments and the best course of

action to achieve a successful commercial venture.

As a leading service provider in the global fund distribution

arena, CACEIS cannot limit itself to simply performing an analysis

of current market trends. We strongly believe that we have a

responsibility to our clients, be they fund distributors, institutional

investors or asset managers, to understand and make preparations

for the future environment in which they will do business. It is

through these attempts to gain a deeper understanding of the

intricacies of the markets in which our clients operate that we are

able to remain a frontrunner, offering innovative services in an

increasingly complex fund distribution environment.

We trust you will find this publication both enlightening and

compelling.

Marc Saluzzi

PwC Luxembourg, Financial Services Leader

François Marion

CACEIS, Chief Executive Officer

Message from the authors

4

This report presents the findings of our research and analysis

over the past six months, including in-depth interviews with

several senior executives at asset management companies,

banks and professional associations whom I would like to

thank for their time commitment and in-depth insights of the

industry.

CACEIS and PwC Luxembourg jointly developed the hypotheses

and analysis for this research and I would like to acknowledge

all our colleagues and experts from CACEIS and PwC namely

Arianna Arzeni, Xavier Balthazar, Olivier Carré, Mark Evans,

Thierry Flamand, François Génaux, Claude Michaux, John

Parkhouse, Christophe Pittie and Didier Prime for their

contributions and support during this project. I would also

like to thank Gregory Weber and Xavier Domalain who provided

essential research to this project.

Our goal is to provide leaders within the asset management

industry with thoughtful insights and create a basis for

discussion on the future of the industry. This research is

independent and has not been sponsored or commissioned

by any firm or institution.

About this report

Dariush Yazdani

PwC Luxembourg, Director of Financial Services Research Unit

www.rethinkingdistribu

4

Message from the authors 3

About this report 4

Executive Summary 6

Introduction 10

Key drivers of change 14

Increase in regulation 16

Increased exposure to emerging markets 18

Change in investor trust and loyalty patterns 20

Focus on pension and retirement products and solutions 22

Increased separation of alpha and beta and competition from other financial products 24

Increasing use of technology to reach investors 26

Scenario Planning 30

Distribution Models 31

Global Fund Distribution 35

Pension and Insurance Markets 38

Substitute Products 42

e-Investors 46

Conclusion 52

Table of contents

bution.com

6

The key drivers of change we have observed in the past few

years are far from being a temporary phenomenon. These trends

are set to cause a significant shift within the asset management

industry. Each of these trends and their effects are distinctive

in nature but the implications for asset managers are to a

certain extent similar. Our research anticipates the following

developments with the industry in the future:

SEGREGATION BETWEEN PURE DISTRIBUTION AND

PURE ADVICE

We believe increased regulation at the point of sale and investor

scrutiny will lead to a segregation between pure advice and

pure distribution. The asset management industry, especially

in Anglo-Saxon countries, will move towards a new paradigm

where, after receiving advice, the investor will execute an

order via a trading platform or an intermediary. However, this

evolution may be slow in Continental Europe where distributors,

as they keep their current commission charging structures,

may be encouraged to further integrate in-house product

manufacturing to better control costs and risks of distributing

funds to a still captive clientele.

RECIPROCITY BETWEEN EUROPE AND SELECTED EMERGING

MARKETS KEY TO LONG TERM GROWTH

To avoid marginalisation and loss of opportunity in playing

a significant role in emerging markets, the European asset

management industry should push for a “Reciprocity

Agreement” allowing the distribution of European funds in

selected emerging markets and vice versa. At minimum an

inclusive process should be considered, where the views,

needs and concerns of emerging market regulators find due

consideration in developing new European fund regulations.

THE RISK OF PENSION SAVINGS WILL NOT BE FULLY

TRANSFERRED TO THE INDIVIDUAL

European governments, particularly, will impose minimum

return requirements on pension savings products. Asset

managers will face challenges in endorsing these risks, or part

of them, and therefore to provide such products independently.

They will be forced to partner with insurance companies and

other providers to bank on this opportunity.

MORE THAN A REGULATORY LEVEL PLAYING FIELD IS

NEEDED TO COMPETE AGAINST SUBSTITUTE PRODUCTS

The regulatory level playing field which is set to partially

materialise in the near future through PRIPs (Packeged Retail

Investment Products) will not result in a significant increase of

competitiveness of the asset management industry. The other

ingredients required from the asset management industry

are better time to market, an improved product fit in terms

of investor needs (such as capital protection and outcome

orientation) as well as increasing the attractiveness of mutual

funds for banking and insurance distributors.

Executive Summary

FACE ATTRITION OR INCREASE INTERACTION, INFORMATION

AND TRANSPARENCY

With increasing use of social media and connectivity, investors

will be better informed and will challenge their advisers.

Advisers will need to ensure that their personal expertise and

sophistication remains high in order to be able to respond to

informed investors and engage in a fruitful dialogue. Asset

managers and distributors will need to provide tools allowing

investors to inform, compare and invest through internet and

mobile solutions. Failure to do so would result in customers

switching to the competition.

To create a competitive advantage in such a new fund

distribution paradigm, our research concludes that the key

implications for asset managers are:

Invest in relationships

Asset managers should invest in close relationships with

distributors, investors and emerging market players to position

themselves as a privileged interlocutor and solution-provider.

Asset management firms should be able to listen to and capture

client feedback, using social media for instance, to deliver

successful products and services in a timely manner. They

should also provide more information, educational materials

and training to both investors and advisers to improve their

financial capability.

Asset managers should draw on their relationships with

distributors, advisers and investors to develop new products,

and move towards solution-based products. To deliver

the required products, they may need to team up with other

financial solution providers.

The most successful distribution strategy cannot be

successful if the product fails to deliver investors the expected

performance, the value-for-money (the maximum client

benefit in the most cost-effective manner) and the safety of

a highly regulated vehicle.

All in all, investors want a new experience from the asset

management industry. The ability of the latter to deliver this

new experience, or not, will dictate how succesful the industry

will remain going forward.

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8

9

Introduction

Rethinking

Distribution

10

The asset management (AM) industry in Western countries has

seen tremendous growth over the past thirty years driven by

strong local and regional economic developments, expansion

in emerging markets and the sometimes artificial appreciation

of underlying assets. However, global trends point towards a

shift in this status quo in the future.

The majority of these global trends, including the shift of

economic power to emerging markets, the ageing of industrial

countries, higher regulation, new technology and social media,

are well recognised. However, their impact is not always clear.

What do these trends mean for European asset managers and

how do they need to adapt their distribution models to be

successful in an ever more competitive landscape?

To enable decision makers to reflect on how best to create

competitive advantages in distribution, as well as developing a

framework for discussion, we have set out a series of potential

scenarios and their plausible implications. Our analysis is based

on six key drivers of change which have the potential to change

the asset management industry:

Increase in regulation

Increased exposure to emerging

markets

Change in investor trust and loyalty patterns

Focus on pension and retirement products and solutions

Increased separation of alpha and beta and competition from other financial products

Increasing use of technology to reach investors

1

2

3

4

5

6

Introduction

11

We identified twenty different scenarios by combining these key

drivers. Based on in-depth interviews with a number of industry

players (asset managers and distributors) we then assessed the

most likely scenarios that could materialise in the coming five to

ten years and their implications on distribution models within

the asset management industry. During our consultations with

industry players there was unanimous agreement on almost

all key drivers of change (with the exception of technology)

with slight differences on the most likely scenarios and speed

of impact on the industry.

 

This report concentrates on the longer term changes affecting

European asset managers distributing UCITS and Non-UCITS

mutual funds within and outside Europe to institutional and

retail investors. A number of drivers are already at work,

ranging from tighter regulation within the AM industry to

the rise of emerging markets. Some asset managers have

already positioned themselves to profit from these shifts.

Understanding the drivers of change and defining a clear

strategic positioning and response will be key to success.

A failure to do so could lead to a loss of positioning and market

share over the long run.

12

13

Key Drivers

of Change

Rethinking

Distribution

14

Key Drivers of Change

Six key drivers of change will impact the future fund distribution paradigm:

from other financial products

15

Focus on pension and retirement products and solutions

Increase in regulation

Increased separation of alpha and beta and competition from other financial products

Increasing use of technology to reach investors

Ageing population in major marketsIncreased pension liabilities & public expenditureLimits of pay-as-you-go systems

Stricter and more uniform regulationIncreased regulatory cost and burdenIncreased focus at the point of sale with diverging

rules at national levelIncreased protectionism

Rise of outcome-oriented products*ETF growthIncreased competition from substitute products

The emergence of mobile technologyGrowing impact of social mediaTargeting a new generation of customers

Increased exposure to emerging markets

Change in investortrust & loyalty patterns

Shift in economic powerPerformance of emerging market fundsGrowing middle-class in emerging marketsSuccess of UCITS in emerging markets

Trust deficitDemand for higher transparencyDiminishing client loyaltyLess captive clientele

AMindustry

Figure 1

Multiple drivers of change are at work in the Asset Manangement (AM) industry

* Outcome-oriented products include liability-driven investments, capital-protected, absolute return and income-oriented products

16

Increase in regulation

The increase in regulation will hit all financial services sectors.

Within the AM industry, as former CESR Chairman Eddy

Wymeersch stated, “like it or not, there is a real avalanche of

regulation coming”. According to EFAMA there are over 25

European and US regulatory initiatives that the European

fund market is being forced to deal with, including UCITS IV,

AIFMD, MiFID II, Basel III, Solvency II, Dodd Frank and Fatca[1].

Regulation is therefore clearly one of the main challenges facing

the industry (see figure 2).

In the past, regulators were more strongly focused on products

which, while increasing costs for asset managers, also enhanced

the development and growth of the industry. As an example,

the UCITS Directive is often cited as one of the most successful

EU initiatives and has been such a success that the UCITS

brand is now recognised as the leading globally distributed

investment product.

With the recent financial crisis and increased political pressures,

regulators have become more focused on investor protection

at the point of sale. This may result in both higher costs for

asset managers and distributors, as well as distortions within

the financial services industry such as product arbitrage by

distributors.

STRICTER AND MORE UNIFORM REGULATION

Fund regulation will become much stricter and more uniform

with the arrival of ESMA (European Securities and Markets

Authority). While supervision will remain with national

regulators, ESMA will be able to issue “regulatory technical

standards” which will be legally binding and become national

law across all EU Member States. This will contribute to further

harmonisation of national regulations and help create a

higher level playing field. UCITS IV and other directives are

set to provide more stringent rules within the industry but

also provide new opportunities for cross-border distributors

and asset managers.

Figure 2

What is the biggest challenge you anticipate facing in 2011?

1

Source : Linedata, Looking forward: State of the AM industry Survey 2011

Market Volatility; 17%

Regulations; 43%

N/A; 3%

Investor/Client Confidence; 37%

[1] Ignites, Regulation avalanche a worry for Europe, 16 March 2011

INCREASED REGULATORY COSTS AND BURDEN

As an example of regulatory burden and costs, the European

Commission estimated the implementation cost of UCITS IV

at around EUR 1bn[2]. Regarding the impact of the AIFM

Directive across Europe, Charles River Associates prepared

a report for the FSA in which a one-off compliance cost of

up to EUR 3.2bn with ongoing compliance costs of around

EUR 311m were expected[3].

INCREASED FOCUS AT THE POINT OF SALE

Since the introduction of MiFID in 2007, regulation has put

more emphasis on distribution and on conflicts of interest.

In the UK, the RDR (Retail Distribution Review) will fundamentally

change the way the market for retail investments is structured

and operates. One of the key objectives of RDR is to address the

potential for adviser remuneration to distort customer outcomes.

Other regulations like Basel III and Solvency II may also indirectly

impact the distribution of investment products. Due to capital

and liquidity requirements, large investors and distributors like

banks and insurance companies could potentially reduce their

exposure to certain higher-risk asset classes. Instead, they may

favour the offering of “on-balance sheet” savings products to

their clients.

INCREASED PROTECTIONISM

Emerging markets may offer significant opportunities for

European funds if they decide to adopt the UCITS brand to

channel their savings into well-regulated vehicles. As UCITS

funds have already been enjoying a growing success in Asia,

Latin America and in the Middle-East for the last five to ten

years, local and/or regional initiatives may emerge to take

greater ownership of asset growth. In Asia for instance, support

is eroding for UCITS funds with the recent regulatory changes in

Hong Kong, such as the requirement of investor characterisation

before the sale of any product containing derivatives.

LOOKING FORWARD: CAN REGULATION DISRUPT THE

EXISTING DISTRIBUTION MODEL?

Increased regulation will have implications for both the asset

managers and distributors. Indeed, it may further strengthen

the power of the distributor, but it may also level the playing

field among the investment products sold via the same

distribution channels. Outside the EU, there are risks that

higher barriers to entering emerging markets may prevent

European players from tapping into this new source of growth.

The question should be how the AM industry will be able to

mitigate those risks.

Figure 3

Times are changing

Liquidity

requirements

IMD II

Bank

capital

rules

Consumer

protection

Solvency II

Corporategovernance &

executiveremuneration

PRIPs

UCITS V

Depositaries

AIFMD

MiFID II

UCITS IV

Asset Management

Insurance

Banking

[2] Commission Staff Working Document, Impact Assessment related to implementation measures of

UCITS IV, April 2010

[3] Charles River Associates, Impact of the proposed AIFM Directive across Europe, October 200917

18

Increased exposure to emerging markets

As GDP growth in emerging markets is expected to increase

more rapidly than in OECD countries over the next decade,

there will be a continued and inexorable shift of economic

power from OECD countries to SAAAME (South America, Africa,

Asia, and Middle East). This will significantly impact the AM

industry, both in terms of investment decisions and distribution

strategies. PwC’s latest analysis anticipates that the GDP of the

largest E7 emerging economies will overtake the current G7

economies by 2020, and China may already have surpassed the

US by the end of the decade[4]. Currently, China has a population

of 1.3 billion and one of the highest savings rates in the world

(53.6% in 2009). It will also have 12 million Chinese millionaire

households by 2020 and its number of middle class urban

households will have trebled[5].

ATTRACTIVE INVESTMENTS

Driven by a low interest rate environment in Europe and a

limited growth potential, investors appetite for emerging

market products has grown. As an illustration of this, the net

sales of emerging market funds increased by 76% in 2010 to

reach more than EUR 100bn, i.e. 59% of total net sales in Europe

(see figure 4).

ATTRACTIVE FUND DISTRIBUTION DESTINATIONS

Asia is the second-largest market for UCITS products after

Europe, accounting for 40% of net sales over the past three

years[6]. While the penetration of European fund managers in the

largest emerging markets remains low, significant opportunities

may arise in the future. Asia accounts for 60% of the total world

population but holds only 13% of AuM (see figure 5).

2

[4] PwC, The World in 2050 - The accelerating shift of global economic power: challenges and opportunities

[5] McKinsey Global Institute

[6] PwC and FSC (Financial Services Council), Asia Region Fund Passport, The Future of the funds

management industry in Asia, November 2010

Source : Lipper datadigest

Source : PwC

Figure 4

Net sales of European domiciled funds (EUR bn)

Figure 5

Amount of AuM compared to population (% of the world total)

2007 2009 2010

300

200

100

0

-100

-200

-300

-400

30.2

Investing in emerging markets

Total

91.657.1

190.4

100.7

170.7

-305

2008

N.A. No data available for net sales of

emerging market funds in 2008

N.A.

Asia Americas

70%

60%

50%

40%

30%

20%

10%

0%

60% Population

AuM

13%

7%

52%

35%

EU

13%

19

THE SUCCESS OF THE UCITS BRAND

Since its creation in December 1985, UCITS have managed to

build an international brand recognition. According to PwC’s

GFD Poster, as at end 2010, 13% of cross border registrations

occur outside Europe, with 77% of these registrations being

from Luxembourg domiciled funds. Market data suggest

that between two-thirds and three-quarters of all existing

offshore funds distributed in Asia are structured as UCITS and

that 90% of all new offshore funds sold in the region are UCITS.

Asian investors could account for 20% of total UCITS assets[7].

LOOKING FORWARD: HOW WILL EU DOMICILED FUNDS

BE ABLE TO MAINTAIN THEIR DOMINANCE IN GLOBAL

FUND DISTRIBUTION?

UCITS funds have already managed to successfully enter

international markets but they may face increased competition

from emerging markets in the future. Therefore, the following

questions may be raised:

It is natural to assume that, sooner or later, the domestic

asset management industry of the emerging economies will

either want to expand their operations or control their level of

access to foreign investors, including those in the EU. However,

can we really expect that European asset managers will have

to compete with emerging market players in both emerging

markets and in Europe?

Given the global desire for increased exposure to growth in

emerging markets, can emerging market players develop

a global rival to the UCITS brand, and if so, what is a

realistic timeline for this to occur within, if at all?

As seen throughout economic history, emerging economies

rely on protectionism to develop and strengthen their

domestic industries before allowing foreign entrants. What

options does the EU have to mitigate this risk? How should

European funds maintain and develop their penetration in

emerging markets?

“Europe has created a global standard

in Financial Services and has the

opportunity to leverage on it especially

after the financial crisis. Five years ago,

when our global Asset Management

team was meeting Asian regulators, a

majority of the questions were posed

to our US partners, now they are asked

to our European team.”

Marc Saluzzi – PwC Luxembourg, Financial Services Leader

[7] According to Terry Pan, Managing Director and Head of Hong Kong Business at JPMorgan Asset

Management , in Global Investor Magazine, December 2010

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Change in investor trust and loyalty patterns

While investors are putting money back into investment funds,

the recent financial crisis has damaged distributor and adviser

reputation. The loss of investors’ trust and loyalty stems from

various factors. These include lack of transparency, performance

and cost. Lack of transparency (e.g. risk disclosures) has been

one of the major causes now being addressed by the regulator,

however the industry will need to work on consistent low

performance and high costs for investors in order to regain

their trust. In the post-Madoff environment, investors are still

concerned about trustworthiness, which remains the most

important factor in choosing an adviser. A PwC/UCL survey

of retail investors in 2009 showed that only 20% of investors

were satisfied with their financial advisers (see figure 6).

Distributors and advisers are now spending more time with

clients explaining their investment choices and showing them

information about the funds. As distributors and advisers strive

not to push products, some investors still perceive them as not

much different from salesmen.

However, a trust deficit does not necessarily lead to investors

switching their providers, as shown by Eurobarometer[8]:

“While only 13% of EU consumers switched their providers for

savings and investment products, only 35% of the ones who

did not switch believed their current bank was providing good

value for money”.

3

Figure 6

Trust deficit of financial advisers. Are you satisfied with your financial adviser(s)?

Source : PwC/UCL Retail Investor survey 2009

Strongly disagree; 10%

Neutral; 47%

Strongly agree; 9%

Disagree; 14%

Agree; 20%

[8] European Commission, Eurobarometer, Consumers’ views on switching service providers, Analytical

Report, January 2009

PRIME RELATIONSHIPS

Today, fund distributors and advisers have a significant

negotiation power towards fund managers. This is evidenced

by the fact that fund managers have to give between 40% and

60% of their management fees to distributors and advisers due

to their prime relationships with an often captive clientele.

With increasing pressure from regulators and investors for

transparency, especially on costs and conflicts of interest,

the future of prime relationships will depend on how loyal

investors will remain towards their distributor and adviser.

21

ROLE OF THE INTERMEDIARIES TOWARDS END-INVESTORS

Fund distribution is mostly a B2B business for fund managers

and there is a continuous trend in the fund industry towards

further intermediation. The share of households ownership in

investment fund assets has been decreasing over the last years

while insurers, pension funds and other financial intermediaries

have been continuously increasing their fund asset ownership

on behalf of end-investors (see figure 7). With a potential shake-

up of investor trust and loyalty, and regulatory changes, the

distribution models may become more complex. This could lead

to a clear distinction between the roles of pure distributors (e.g.

Stock Exchanges) and pure advisers. On top of these two roles,

we anticipate the emergence of new types of intermediaries

which will help investors to make more informed investment

decisions (e.g. social media).

LOOKING FORWARD: HOW WILL THE RELATIONS

BETWEEN FUND MANAGERS AND DISTRIBUTORS/

ADVISERS EVOLVE?

With increasing investor and regulatory scrutiny on the

distribution of investment funds, the question is how much

the model of large distributors, generally vertically integrated

groups in Continental Europe, will change. In Anglo-Saxon

countries, with investors welcoming the end of product

influence, how will advisers position themselves towards

traditional distributors?

Figure 7

Investment fund asset ownership (share in percent)

Source : EFAMA Factbook 2010

General government

Insurers & pension funds

Other financial intermediaries

MFIs

Non-financial corporations

Households

9.1

2004 2005

42.8

10.8

11.6

22.5

2.5

9.8

39.9

10.1

13.4

24.7

2.8

9.6

2006

37.0

9.5

15.6

25.4

2.9

9.2

2007

35.5

8.7

17.0

26.4

3.2

9.0

2008

34.6

8.8

15.6

28.6

3.4

7.8

2009

32.4

8.6

15.8

32.0

3.4

22

Focus on pension and retirement products and solutions

According to the United Nations figures[9], the proportion of

the world’s population aged over 65 is set to more than double

by 2050, to 16.2% from 7.6% currently. By 2050, approximately

1 billion people will be over 65 years. More specifically in

Europe, 50% of the population will be more than 55 years old

by 2050 (see figure 8). Given that a large majority of assets under

management is held by the eldest part of the population, the

fund industry bears significant risks of asset outflows due to

decumulation (the conversion of assets accumulated during

an employee’s working life into pension income at retirement

age). On the other hand, as governments are increasingly

moving away from pay-as-you-go systems and as decumulation

also embodies a significant new risk (longevity risk) for the

record number of future retirees, significant opportunities for

fund managers may arise provided that they are able to offer

adequate long-term pension and retirement solutions.

INCREASED PUBLIC PENSION EXPENDITURE

By 2050, for every retiree in the EU, there will be only two

workers, which represents a major deterioration from the

current ratio of 1:4. The ageing of the population will also

affect emerging markets like China which will have five workers

for every retiree by 2020, compared to a ratio of 1:10 in 1990.

As a consequence, public pension expenditure will grow to

represent on average 12.4% of the GDP in 2050 in Europe

(vs. 10.3% today[10]) and up to 16% in Spain (see figure 9).

4

[9] United Nations, World Population Prospects, the 2010 revision

[10] The 2009 Ageing report (European Commission, 2008)

[11] European Commission – Sustainability report 2009

In the current context, the cost of caring for retired people will

profoundly affect growth prospects and will increase the level

of debts. Even a consolidation of 1% of GDP per year over 20

years may not fully bring back debt to the 60% GDP reference[11].

Figure 8

Western Europe Population (millions)

Source : World Bank

2010

Age 22-55

Age > 55199

62%

123

38%

2050

166

50%

167

50%

350

300

250

200

150

100

50

0

23

THE MOVE FROM PAY-AS-YOU-GO SYSTEMS WILL

LEAVE FUTURE PENSIONERS TO DEAL WITH CRITICAL

INVESTMENT DECISIONS

The greying of Europe, coupled with the increased longevity of

the population, will pose a problem to pay-as-you-go pension

schemes. European governments are reacting to this issue

by shifting the responsibility of retirement planning to the

working-age individuals. This, however, creates a new challenge

for individuals who now have to make investment decisions for

their own long-term financial well-being. These decisions need

to take into account the savings required to meet the longer

period of retirement due to the increase in life expectancy

(longevity risk), as well as considering the risk of investment

and inflation.

THE CHALLENGE OF THE AM INDUSTRY TO PROPOSE

PENSION AND RETIREMENT SOLUTIONS

The asset management industry has a critical role in supporting

individuals by delivering products suited to their retirement

needs. Products must be designed, not only to save for

retirement, but also to allow steady income flow after the

accumulation phase to safeguard the investor against

insufficient cash flows in old age.

LOOKING FORWARD: HOW DO AM DISTRIBUTION

STRATEGIES NEED TO ADAPT TO TACKLE THE RISKS

AND OPPORTUNITIES ARISING FROM THE AGEING

POPULATION?

As governments withdraw from pay-as-you-go systems, it raises

the obvious question as to who will accept the future risks of

providing for retiree income when the state will no longer do

so. Will the risks fall to the retirees, who must ensure that they

set aside sufficient savings to draw down in the future, and if

they fail to do so, end up suffering the consequences i.e. old

age poverty? Or will the investment industry be bound to carry

the risk, whereby if assets under management fail to produce

the required returns needed for the steadily larger outflows

of retiree income, the losses must be covered by the product

manufacturer?

In this case, what would be the impact on the competitiveness

of the asset management industry, considering that today,

the fund industry is not fully equipped to offer pension and

retirement solutions?

Figure 9

Increase in public pension expenditure by 2050(% expected GDP)

Source : European Commission

ES

20%

15%

10%

5%

0%

-5%

Current level (GDP pp)

Additional expense (GDP pp)

7.1%

8.4%

RO

8.2%

6.6%

IT

0.7%

14.0%

FR

1.2%

13.0%

HU

2.3%

10.9%

DE

1.5%

10.4%

LT

3.6%

6.8%

CZ

2.4%

7.8%

SK

2.6%

6.8%

UK

1.5%

6.5%

IE

4.0%

4.0%

Total

2.1%

10.3%

PL

2.5%

11.0%

24

Increased separation of alpha and beta and competition from other financial products

The increased specialisation of investment funds, to better

match investor’s constraints, and the competition from

substitute products are two major drivers likely to reshape

the investment fund industry in the coming years. On the one

hand, the increased specialisation of investment funds has

been driven by the growing need of investors to diversify their

portfolio to comply with specific risk/returns constraints leading

to further sophistication (such as LDI, etc.) of the industry.

On the other hand, the competition from other financial

products is caused by the development of savings products

which can be packaged with the same content into different

wrappers and be sold to the same investor, via the same

distribution channels. As from 2006, the share of structured

products and ETP relative to the European fund industry has

steadily grown from 9% in 2006 to 13% in 2009 after a peak of

17% in 2008 (see figure10).

THE SEPARATION OF ALPHA AND BETA

Over the past years, the AM industry has gradually split between

products offering pure exposure to beta, like index funds or

exchange-traded funds (ETFs), and products delivering alpha

(see figure 11). This trend is leading asset managers to either

provide cheap beta, which results in pressure on fees of active

managers not able to create alpha, or be able to provide alpha to

demand a premium. However, core-satellite allocation strategies

are bridging active and passive exposure to propose investment

solutions to institutional investors. The strength of the core-

satellite allocation is to provide institutional investors with an

adequate level of transparency for performance attribution

with the clear isolation between the alpha and the beta.

5

Figure 10

Evolution of mutual funds in Europe vs. substitute products (EUR bn)

Source : PwC Analysis

2006 2008 2009 2010

7 000

6 000

5 000

4 000

3 000

2 000

1 000

0

5 956

UCITS Assets

Structured Products & ETP

558

4 543

764704

2007

6 159

782

5 990

801

5 315

INCREASED COMPETITION FROM SUBSTITUTE PRODUCTS

Financial innovation and the broader range of financial

products is constantly giving investors alternative means to

achieve their financial goals. In the past, money market funds

substituted for bank deposits and equity funds substituted for

direct holdings of equities. More recently structured products,

notes and certificates intended for different investors have

become close substitutes for investment funds. The threat

for the fund industry is all the more important when the cost

to switch to structured products and the perceived level of

product differentiation are both very low. In addition, current

regulation is creating distortions allowing for product and

distribution channel arbitrage.

While most of the substitute savings products cannot deliver the

same level of investor protection, as shown during the recent

financial crisis, substitute products have proved to be efficient from

an investor point of view. Substitute products allow for a broad

range of asset classes and investment strategies and can as well be

developed and brought to the market faster to satisfy new market

developments and new trends. Substitute products developed

by the insurance industry are often marketed with a focus on

“tax optimisation” (e.g. investment life-insurance contracts).

Substitute products not only provide investors with fast

and targeted solutions but can also prove advantageous to

distributors and issuers. With regulators demanding higher

capital requirements, banking and insurance distributors are

shifting their product focus to minimise the need for additional

capital. In doing so, they might prefer to sell cash deposits

(vs. money market funds). This could be a more difficult

arbitrage going forward. Moreover, structured products

are attractive to issuers and distributors who look for both

quick revenue streams and churn in customer portfolio. Such

products have high upfront fees and set maturities in contrast to

mutual funds which are pre-dominantly open ended and offer

a regular revenue stream for asset managers and distributors

over the holding period by the customer.

LOOKING FORWARD: TO WHAT EXTENT WOULD THE ASSET

MANAGEMENT INDUSTRY BE ABLE TO COMPETE WITH

SUBSTITUTE PRODUCTS?

Investment funds protect investors through strict investment

and diversification rules, efficient supervision of both the fund

and the management company, the separation of management

company and safekeeping of the assets. The European

Commission aims to create a robust and coherent framework

for PRIPs which will provide for consistent and effective

investor protection and a level-playing field for distributors

and originators. However, it is still uncertain how investment

funds will be able to gain market share by competing in terms

of product efficiency (e.g. capital protection, cost and tax

efficiency…).

Figure 11

Comparative growth of funds, by investment strategies

Source : PwC Analysis based on Lipper FMI figures

Bond

Equity

Mixed

MM

Absolute returns

ETFs

Traditional strategies

Alpha strategies

Beta strategies

+7.9%

+11.9%

+20.2%

+7.3%

-3.8%

+6.7%

2009 (% net sales/AuM)

+9.6%

+19.4%

+15.3%

+11.7%

-10.2%

+4.0%

2010 (% net sales/AuM)

25

26

Increasing use of technology to reach investorsThe development of mobile technology and the emergence

of social media offers individual investors innovative ways to

access and scrutinise the investment fund industry. It also

represents a new challenge for fund promoters who are now

required to evolve their marketing strategy to be visible on

these new communication channels.

THE EMERGENCE OF MOBILE TECHNOLOGY

The greater use of mobile technology has spurred the

development of applications tailored to the asset management

business. As shown in figure 12, the number of active users of

mobile banking and related services is expected to multiply by

16 by 2015 (close to one billion people). Distributors on the front

line have started providing their clients and prospects with real

time accessible applications to track their fund performances

and to carry out subscription and redemption operations.

For instance, in the UK, one of the biggest fund distributors

is already proposing an application on iPhone allowing their

clients to get information regarding fund price, performance

and management fee on a range of more than 1,000 funds.

Clients also have the opportunity to invest through the fund

platform.

GROWING IMPACT OF SOCIAL MEDIA

Social networking has become a major trend for both personal

and professional purposes. Social networks allow people to share

information, opinions and even recommendations on all types

of topics. While the phenomenon is already widespread in many

countries (see figure 13), is there really a strong impact on the

fund management industry to be expected from social media?

6

Figure 12

Number of active users of mobile banking and related services, forecast (in millions)

Source : fst

2009

55

2015

1000

750

500

250

0

894

27

TARGETING A NEW GENERATION OF CUSTOMERS

Investors still favour their distributors and advisers to access

investment products, although they are likely to use many

channels to access both advice and products. In the future

these prime relationships could be challenged by the new

generation of students and young professionals, who may be

more financially literate.

LOOKING FORWARD: IS THE EMERGENCE OF NEW

TECHNOLOGY LIKELY TO DISRUPT THE CURRENT

DISTRIBUTION CHANNELS?

The status of social media is steadily evolving from a leisure

activity to a strategic marketing tool for the industry. What will

the future role of social media be within financial services?

Will new media and new generations of investors and advisers

behave in the same way as previously or will they adopt new

behaviour?

Can we expect tomorrow’s consumers of financial products to

place as much trust in personal relationships and one-to-one

advice as before, or will they become more remote and data

guided in their investment decisions?

Will a pervasive internet coupled with the explosion of social

media and new norms of communication have a significant

effect on the client and adviser relationship?

Will the new applications and channels afford real competitive

advantage to savvy firms, or can we expect to see limited

innovation in terms of client relationship management?

“ We are told that RDR is the next big

thing we need to be thinking about,

but I think it pales in significance

compared to the impact social media

will have on our industry.”

Phil Calvert, IFA Life - The Social Network of IFAs and Financial Planners

Figure 13

Share of social networking users, % (2010)

Source : Pew, 2010

0% 10% 20% 30% 40% 50%

US

UK

South Korea

France

Spain

Germany

Turkey

Japan

China

India

46%

43%

40% 40%

36%

34%

31%

26%

24%

23%

12%

28

29

Scenario

Planning

Rethinking

Distribution

30

Scenario Planning

Based on the combination of key drivers of change we identified twenty different

scenarios (four scenarios for each reasonable combination of two key drivers)

around the following themes:

We then assessed the most likely scenarios that could materialise in the coming

five to ten years and their implications on distribution within the AM industry.

31

Scenario PlanningDistribution Models

Regulation and changes in customer behaviour have the

potential to disrupt current distribution models. While a trend

towards open-architecture and the separation of manufacturing

and distribution was announced several years ago, there are

still different degrees of openness in Europe. Open-architecture

means that the fund manufacturer and distributor belong

to different groups but many large European banks are still

debating the choice of selling their own manufactured products

or those from third parties.

In fact, any move will depend highly upon a clear change in

regulation at the point of sale and/or client captivity with their

distributor or adviser.

The axes for our scenario planning represent the degree of

regulation at the point of sale versus the clientele captivity,

where we attempt to chart the likely outcome of this fusion

of established captive clientele and further liabilities on

distributors (see figure 14).

Current distribution models will prevail given that regulation at

the point of sale will not increase and distributors will still benefit

from a captive clientele.

With higher regulation at the point of sale and less captive

clientele, distribution will become more complex with a

segregation of advice, distribution and asset management. There

will also be a growing number of gatekeepers between AM and

distributors (wrap platform, distributors’ fund selection unit…)

Although there will be no increase in regulation at the point of

sale, lower captive clientele will lead to investors increasingly

evaluating and comparing products and advice offers to meet

their needs. This will result in a higher competition between

distributors, as well as AMs, to gain market share.

Continental European model

Business as usual

Anglo-Saxon model

Increased competition

Low High

While investors remain sticky to their distributor, regulatory

pressure at the point of sale and at national levels will result in

higher liability for distributors who may favour selling their own

products to better control increased costs and risks. This would

lead to players increasingly concentrating asset management,

distribution and advice activities within their own group rather

than sourcing these from various players.

Captive clientele

Reg

ulat

ion

at t

he p

oint

of

sale

Hig

hLo

w

Figure 14

1

32

WHERE DO WE STAND?

The structure of the fund industry has changed relatively

little over years. According to a speech of Mario Draghi[12], the

governor of the Bank of Italy, no less than 90% of Continental

European retail management activity is carried out under the

vertically integrated model compared with less than two thirds

in the US and the UK.

In Continental Europe, the major AM firms remain generally

fully-owned subsidiaries of large banking and insurance groups

but recent events may change this situation. During the latest

financial crisis a few financial groups sold their AM arms to

restore their capital strength, often because these subsidiaries

are generally more autonomous and easier to sell than core

banking activities like retail and investment banking units.

In addition, small independent boutique-style asset

management firms have recently managed to rank among

the top European master groups in terms of net sales.

While the integrated model still remains dominant, we

believe that increasing regulatory scrutiny and/or weakening

of the prime relationships between clients and distributors,

have the potential to fundamentally impact the distribution

marketplace.

WHAT DO WE EXPECT IN THE LONG TERM?

With increased regulation at the point of sale, the asset

management value chain will become more complex as

pure advice will be segregated from pure distribution.

This evolution will allow the AM industry to implement a clear

difference between the buy- and sell-sides, and independent

research and advice. However, the pace of evolution may

vary. As long as clients remain captive to their distributors,

the distribution models will not radically change. However,

as investor scrutiny increases and financial education improves,

investors will increasingly look for best of breed products and

their respective providers. Looking forward, we believe that over

the next five to ten years, the Anglo-Saxon and the Continental

European models may evolve differently and we anticipate an

increasing gap between them. While in Continental Europe,

investors will remain captive to their banks, consumers in

the Anglo-Saxon countries will welcome the end of product

influence and recognise the intrinsic value of advice.

 

Increased regulation at the point of sale will further widen the

gap between the two models. On the one hand, Anglo-Saxon

regulators are trying to move the industry away from selling

products towards true independent advice which will result

in a clearer segregation of asset management, distribution

and advice. Indeed one of the key plans of the FSA’s Retail

Distribution Review in the UK for instance is the Adviser

Charging regime. Under this regime, advisers will no longer

be allowed to receive commission on the retail investment

products they recommend. This model is likely to disrupt the

way advisers operate as according to JP Morgan research[13],

while 60% of consumer approve Adviser Charging regime, only

8% of the population currently pay for or claim to be willing to

pay for advice on their savings and investments.

[12] Mario Draghi, Transformation in the European Financial Industry: Opportunities and Risks, Frankfurt,

22 November 2007

[13] J.P. Morgan Asset Management, Adviser Charging: putting a price on financial advice, May 2011

Rethinking

Distribution

On the other hand, as Continental European players will

keep to their current commission charging structures, the

segregation between pure distribution and pure advice may

be slow. Increased regulation at the point of sale will encourage

distributors to develop their own products to better control the

costs and risks of distributing funds to a still captive clientele.

This would lead players to increasingly concentrate on asset

management, distribution and advice activities within their

own group rather than sourcing these externally.

WHAT WILL BE THE KEY IMPLICATIONS?

As we move towards a clearer segregation of pure distribution

and pure advice, two differing distribution models will exist.

Implications of the Anglo-Saxon model towards a segregation of

asset management, distribution and advice

Strengthen Customer Relationship Management

The Anglo-Saxon model will be characterised by a greater

fragmentation of the distribution marketplace. To promote

their products, AM firms will need to set-up marketing and

sales teams to improve their proximity to distributors and

advisers. Customer Relationship Management will be essential

to listen to both distributors and advisers’ needs and liaise with

them on a regular basis to inform them on significant market

movements, new trends, changes in portfolio asset allocation

and fund performance.

Focus on Client Services

Distributors and advisers will desire increased added services

that allow them to decrease their administrative and compliance

burden. In addition, AM firms can develop services like alerts

and reportings that distributors and advisers could provide

their clients. With the diminishing influence of commission

based advice, added value services provided by AM players

will become all the more important for advisers.

Build brand to enhance pull from investors

The segregation of asset management, distribution and advice

will put greater responsibilities on AM firms to develop their

brand and differentiate themselves. As the industry will move

more from a push to a pull approach, where investors will have

a greater power in investment decision-making, the AM brand

will be critical to attract investors’ interest.

Offer tailor-made products to distributors and advisers

Advisers and distributors will have different needs that AM

firms will need to address. To justify the intrinsic value of advice,

advisers will be offering more sophisticated services and AM

firms will have to develop tailor-made products in order to

develop solutions in close collaboration with advisers that

meet end-investor needs.

33

34

Implications of the Continental European model towards further

vertical integration

Integrated AM fi rms should maintain the widest possible

range of products

Large distributors like banks and insurance companies will

require their AM arms to off er a wide range of products

suitable for diff erent categories of clients (retail investors,

HNWI, corporate and other institutional investors). In order to

address the needs of their various clients and react rapidly to

any change in client preferences and market fl uctuations, they

will require AM products to cover all the main markets through

most asset classes and investment themes. This means for

integrated AM fi rms that they will have to maintain off -the-shelf

funds with low AuM and therefore lower profi tability levels.

Independent AM fi rms should focus on product innovation

and niche products

As integrated AM fi rms will already have to manage large

product ranges they may no longer have huge opportunities

to develop and test new investment ideas and strategies.

As a consequence, they will leverage on independent AM fi rms

that can demonstrate capacity to deliver robust performance

through new investment strategies. Integrated AM fi rms will

hence look for investing in other AM funds (e.g. funds of funds),

develop long-term partnerships (e.g. seed money, incubator)

and develop a network of small AM fi rms/boutiques.

Improve communication between AM fi rms and

distributors

With increasing regulation at the point of sale, distributors will

need to control compliance risks and therefore require AM

fi rms to provide distributors with high transparency, training,

adequate marketing tools and any other relevant services.

As distributors will increasingly rationalise their processes, they

will limit the number of their AM providers and try to develop close

relationships and improve the fl ows of information with them.

Decrease of management fees and introduction or increase

of performance fees

Regulation will heap additional costs and burden on distributors.

As it will be diffi cult for distributors to pass on these costs to

investors, they are likely to put pressure on AM fi rms, especially

given the power they have over a captive clientele, to increase the

levels of commissions resulting in decreased management fees.

AM fi rms could mitigate this decrease in their revenues through

increasing or setting-up higher levels of performance fees.

35

The economic and demographic fundamentals of emerging

markets support the view that it will be the “future growth

engine” of the global fund management industry. This key driver

will pose both opportunities and threats to the European asset

management industry in the future, which is captured through

the scenarios (see figure 15).

Currently the total funds under management (FUM) across

Asia (ex-Japan) and South America account for about 10% of

global FUM which is set to increase in the future. Given these

prospects the question on emerging competition from local

players stemming from these regions should be considered.

These players could not only compete with European players

in their local markets where they have the respective expertise

and understanding but also in European markets where they

would compete predominantly on emerging market products.

Scenario PlanningGlobal Fund Distribution

EU domiciled funds will lose their dominance as other regional

or national frameworks reach critical mass. They may even be

locked-out of the major emerging markets and have to compete

in Europe with new entrants from emerging markets.

Despite increasing competition from emerging market players

in emerging markets, the European AM market remains

out-of-reach and still dominates international fund

distribution activities.

Other national/regional fund frameworks will be developed and

reach critical mass to bring safekeeping of assets to emerging

markets. European AMs will have to cope with increasing

regulatory barriers and competition in emerging markets.

Comparative advantage

Loss of global dominance

Business as usual

Hindered path

In emerging

markets only

In emerging markets

and in Europe

EU domiciled funds will have a comparative advantage for

international distribution but European players will face increased

competition from emerging market players in both their home

countries and Europe.

Competition from emerging market players

UCI

TS /

AIF

M b

rand

Dom

inan

tCh

alle

nged

Figure 15

2

36

We have taken this key driver into account on the horizontal

axis on which we have indicated whether the competition from

emerging market players will take place in emerging markets

only, or also in Europe.

In the past, the UCITS brand has been key to the success of

European players within a number of Asian and emerging

markets. As mentioned in the previous section a significant

portion of sales of European fund stems from Asia and more

than 5,000 UCITS products are being sold in this region.

Moreover, the newly promulgated AIFM Directive, intended to

overcome the barriers and inefficiencies created by the current

patchwork of national regulation, has also the opportunity to

repeat the current success of the UCITS brand and become

a trusted and attractive international brand leading to the

expansion of the Non-UCITS market. On the other hand, there is

rising interest within the Asian market to develop an Asian fund

passport to overcome national regulatory barriers, effectively

challenging the dominance of the UCITS brand. This concept

is demonstrated through the vertical axis of the figure above.

WHERE DO WE STAND?

Currently, Western asset managers can expand freely in Europe

and in a number of emerging markets without facing intense

competition from emerging market product providers. The

European players compete mainly among themselves and with

other international asset managers on more or less a level

playing field. Although local players are gradually emerging,

so far competition from them remains marginal. Moreover,

the recognition of UCITS worldwide has opened the door for

this product to several foreign countries, to the point where no

other national framework is currently able to compete.

WHAT DO WE EXPECT IN THE LONG TERM?

European asset managers will have to compete with emerging

market players in both emerging markets and in Europe

We believe emerging market players will strengthen their

position in the local markets and leading players, already well

established on their market, will attempt to increase their client

base by targeting new regions. Moreover, the growing needs of

European institutional investors searching for higher returns is

likely to attract foreign competitors. Hence we expect that ten

years from now, European asset managers will have to compete

with emerging market players in both emerging markets and

in Europe (providing emerging market expertise to European

investors).

UCITS brand can be expected to retain its international

dominance

The development of a distribution passport is a long term

investment, and despite the advantages of European integration,

the UCITS product was more than 20 years in development

before it could reach its current level of recognition – and it

still has further to go.

Discussions around the Asian passport and regulation

encouraging national protectionism can be perceived as a

potential threat for UCITS but this new label is far from being

established. Emerging countries are lagging behind and we

do not expect another international standard to compete with

UCITS in a foreseeable future.

Hence we believe that the future European asset management

industry will still have a comparative advantage through the

dominance of the UCITS brand across the world. However, European

asset managers will have to adapt to an increased competition from

emerging market players who can also use the UCITS brand to

compete in their local as well as international markets.

WHAT WILL BE THE KEY IMPLICATIONS?

Understand the local market specificities

European Asset Managers may have difficulties in dealing

with investment and product preferences of local investors,

highlighting the necessity to set up a local presence (especially

in sales and distribution). With the support of adequate skills and

expertise in investment and distribution, European promoters

will be likely to deliver attractive performances and adapt their

fund range to local demand. An interactive dialogue between

the sales team and local distributors and investors as well as

a clear process of feedback to, and cooperation with, central

product development teams will be key to success.

Partnering with local managers for expertise

Risks when entering a new market could be reduced through

partnering with local emerging market players to leverage

on their market knowledge as well as distribution power.

Partnerships will also be the dominant distribution strategy

in countries where protectionist regulations prohibit a foreign

market entrant without involvement of local players. However,

careful consideration needs to be taken while choosing the

right partner with clear evaluation of the added value input

and expectations of both partners.

Build brand trust

Brand is a key success factor when entering a market. In this

context, the UCITS brand has been a door-opener for many

large European fund managers. It will be up to the industry

and the European regulators to maintain the brand quality.

Asset managers have now also started to invest in their own

brand to increase their recognition in emerging markets. When

targeting retail investors, building a brand could increase sales

through demand for the specific brand through the investor.

IMPLICATIONS FOR THE INDUSTRY AND

REGULATORS

The tremendous potential of emerging markets provides a huge opportunity for the European fund industry. However, an increasing level of protectionism on behalf of emerging countries may put the potential of distribution of European funds at risk. The establishment of a “Reciprocity agreement” allowing on one side European funds to be distributed freely in selected emerging markets and on the other side, emerging market funds to be distributed in Europe without restrictions would ensure a sustainable and significant growth of the European market for the long term. Another step would be to allow for some Asian and emerging market regulators to be an integrative part of new regulatory developments around European fund regulation. This does not need to go as far as giving such regulators voting rights but instead close consultation, dialogue and weighing their concerns within development of new regulation. These actions should be accompanied by a strong push of the industry to strengthen the trust in the UCITS brand internationally and building of trust in AIFM.

37

38

The ageing population is a trend that raises significant risks

and opportunities for the fund industry. The first risk is that the

flow of investment into the asset management industry will

steadily decline as today’s retail investors turn into tomorrow’s

retirees, with a far smaller workforce taking their place. Another

threat is that the asset management industry might fail to

provide the guaranteed return and income products that

are increasingly required by an ageing market for retirement

funding. The flip side is that the industry still has time to develop

these products and to position itself to seriously compete in a

market traditionally dominated by insurance firms. According

to EFAMA, a retirement plan, with unified standards across

the EU and certification given by the appropriate regulatory

body, could be introduced. This “Officially Certified European

Retirement Plan” (OCERP) proposed by EFAMA could take a

form of a wrapper and form part of both Pillar 2 and Pillar

3. This would create a level playing field for retirement plan

providers across the EU (insurance companies, banks and

Scenario PlanningPension and Insurance Markets

Despite increased pension savings in voluntary vehicles, the AM

industry will not be equipped to endorse risks and hence compete

directly on the pension and insurance market. However, AMs will

be able to develop partnerships with other pension and insurance

providers to offer long term solutions.

As risk is being transferred to individuals, AM products will

become more relevant to the pension and insurance market.

However, as the population will still rely on public pensions,

the pension and insurance market will only offer limited

opportunities.

New opportunities

Low penetration

Limited opportunities

Business as usual

HighLow

The AM industry will develop adequate long term solutions for

pensioners offering minimum guarantees. Funds will capture a

significant market share within a growing pension and insurance

market as a part of the risk is transferred to individuals.

Savings in voluntary pension and insurance schemes

Ris

k is

tra

nsfe

rred

to

Part

icip

ants

Spon

sors

of

pens

ion

and

insu

ranc

e ve

hicl

es

Figure 16

The pension and insurance market (excl. pillar 1) will not expand

extensively as the population will rely on public pension and

insurance systems and sponsors will still have to guarantee

minimum return on investment.

3

asset managers)[14]. Alternatively, a UCITS-style product

(with revisions regarding the daily liquidity and other features)

could be created with underlying assets and an investment

strategy that aligns with expectations of long-term investors in

relation to risk management, fees and reporting requirements[15].

However, turning a savings product into a retirement solution

which would offer guaranteed lifetime income to pensioners

brings new complexities. These include the obvious investment

and interest rate risks which the asset management industry is

familiar with, but also longevity and early retirement risks, an

issue generally tackled by the insurance sector.

Two main components frame the discussion on this area.

The first is the allocation of risk, and the second is the future

development of voluntary pension and insurance schemes.

If governments withdraw from pay-as-you-go systems, will

the risks fall to the retirees, who must ensure that they set

aside sufficient savings to draw down in the future, and if they

fail to do so, end up suffering the consequences i.e. old age

poverty? Or will the investment industry be bound to carry

the risk, whereby if assets under management fail to produce

the required returns needed for the steadily larger outflows

of retiree income, the losses must be covered by the product

manufacturer? We consider this on the Y axis of our figure 16.

The development of the pension fund and insurance market

will be highly dependent on the growth of voluntary pension

and insurance schemes, and we consider the likelihood of this

on the X axis.

WHERE DO WE STAND?

Pay-as-you-go systems still guarantee minimum pensions

for the near term but the recent financial crisis has impacted

pension policy in the EU as national debts now surpass historic

levels. The trend by which the extension of working lives

combined with a gradual retreat by the state appears to have

accelerated, as the economics of the pay-as-you-go system

cannot be supported in the future due to a combination of

government indebtedness and poor worker-retiree ratios. States

are now pushing towards longer working careers and reviewing

pension benefit provisions with an eye on future affordability.

Recent pension reforms are also developing mechanisms

to encourage private personal savings, mostly through tax

incentives and mandatory default schemes. However, voluntary

pension and insurance schemes still represent a low proportion

of the market, the majority of which still mainly rely on pillar 1

(public finances). In addition, insurance products remain the

preferred retirement voluntary products due to traditional

risk expertise in the sector and regulatory and tax advantages.

WHAT DO WE EXPECT IN THE LONG TERM?

Savings in voluntary pension and insurance schemes will

grow but at a slow pace

With increased levels of public debt and expenditure (which

in themselves require decades to reduce to acceptable

levels), coupled with the growing liabilities of the state

regarding retirement funding for the population, it is clear

that current levels of state support are unsustainable.

Hence, it can be expected that the incentives for voluntary

retirement savings schemes are only likely to increase. States are

likely to continue to put in place, despite their current level of

deficits, incentives for voluntary retirement savings like preferential [14] EFAMA, Revisiting the landscape of European long-term savings, March 2010

[15] PwC/CACEIS, Ideal Fund: Reengineering the fund value proposition, June 2009

39

40

tax treatment for pension plans. Alternatively, mandatory

plans, similar to the Australian Superannuation scheme, may

be introduced. Overall, the awareness of individual investors

regarding the inoperability of the pay-as-you-go system in

the long-term is slowly increasing, especially ‘Generation Y’

(those deemed to have been born sometime between the

late Seventies and the late Nineties) who will be more likely

to invest earlier for the long-term. Either way, private schemes

are forecast to grow, albeit at gradual pace and in response to

public policy.

Risks will be transferred to sponsors of pension vehicles

With the withdrawal of the state from retirement funding,

the obvious question is raised as to who will accept the future

risks of providing for retiree income when the state will no

longer do so. As it seems unlikely that individual investors will

be left alone to bear the risk of their long-term savings, only the

private sector is left. While we strongly believe that the asset

management industry may have a critical role to play in the

area, the extent of the opportunity will be based on a number

of factors described below.

WHAT WILL BE THE KEY IMPLICATIONS?

Partner with insurance companies to develop tailor-made

products embedded in insurance wrappers

When considering the risk of decreasing assets (given that

investment is mainly held by people near retirement age), the

asset management industry needs to consider how they can

gain in a market which will shift to providing future retirees with

investment solutions. However, when it comes to retirement

products, the asset management industry is not currently

equipped to endorse the inherent risks of the decumulation

phase. To do so may impose on asset managers similar

capital requirements now required in the insurance industry.

Instead, an alternative is for the asset management industry

to combine its expertise with that of the insurance industry

to offer more long-term, guaranteed (capital and annuities)

solutions and outcome-oriented products. 

Adapt pricing (low margins) required for long term savings

products

Retirement planning is widely recognised as the most vital

long-term savings need of all working age individuals, due to

the changing demographics described previously in our key

drivers. As a consequence, to support the growth of voluntary

savings within pension vehicles, it is important for sponsors of

pension funds to be able to benefit from a scale of economy

whereby low margins can be applied to high volume products.

How this should be specifically accomplished is a matter

of debate, but it seems clear that continuing government

incentives or regulation will form part of the solution. Regardless

of how the volume is reached, it will assist in competitive pricing

and potentially an attractive and innovative fee-structure.

Regarding innovation in the fee structure, in our previous report

published in 2009: “Ideal Fund - Reengineering the fund value

proposition” one of our recommendations was the introduction

of an ‘objective fee’. As the goal of pension vehicles is to meet

the investor‘s financial objectives (i.e. providing investors with

capital at the retirement age rather than to adhere to a fixed

strategy), it was suggested that fees for retirement products

be linked to the risk/return objectives within the investor’s

timeframe. This is intended to align the investor and asset

managers’ goals, and would differ from performance fees which

are based on outperforming a certain level of return.

41

Rethinking

Distribution

Brand and investor trust is key due to the long-term

commitment of the investors to the product

Assuming the high level of responsibility borne by the

promoter of retirement vehicles when considering the

substantial fi nancial commitment required in the long term

by investors, brand and investor trust will be a key factor of

success when attracting clients to a pension plan. This may

require signifi cant investment on the part of pension product

providers, particularly in the wake of the recent fi nancial crisis,

to acquire the trust of long term clients.

 

More than any other sector being examined, the area of

pensions is the most dependent on government reaction –

due simply to the fact that, while state pensions off er a safety

net, retail investors will be less inclined to save for retirement.

However, while the timeline to transition from the current level

of state benefi ts to the (presumably much lower) levels to be

off ered in the future is unclear, what is largely agreed is that

the shift of responsibility away from the state and to the private

sector will eventually occur. This should in turn generate the

larger infl ows which can cater for a more competitive market

in terms of the provision of long-term investment solutions.

42

The most common types of substitute products for investment

funds according to EFAMA are structured products, closed-

ended funds and Euro Medium Term Notes that are linked to

an underlying index. Products which provide exposure to asset

management strategies that are typical for investment funds

(both active and passive strategies) and which promise fund-like

returns, often linked to equity, commodity or property indices,

and often generated through the use of derivatives without

direct investment in the underlying asset can be considered

as substitute products to investment funds.

Scenario PlanningSubstitute Products

Investors can choose between efficient solutions provided by

AMs and other industries. However, the comparability of products

across various industries will remain limited.

Despite comparable requirements, AM products do not manage

to offer the investors the same levels of product efficiency as

structured and insurance products.

AM products lag behind substitute products which are able to

offer more efficient solutions to investors without transparency

requirements and related burden.

Fair Competition

Limited comparability

Unmatched needs

Business as usual

HighLow

Investors looking for efficient solutions can make an informed

choice between funds and substitute products.

Fund product efficiency

Tran

spar

ency

Com

para

ble

Non

- co

mpa

rabl

e

Figure 17

4

43

With global sales of USD 376bn in 2010[16], structured products

pose a potential threat as substitute products to the AM

industry. The main difference between substitute products

and mutual funds is the principal protection option and

the customisation to a specific investor’s view of the market

offered by substitute products. Most of these are outcome

oriented, which give investors a certain degree of certainty

and security, and the fiscal advantage of the product increases

investor appetite. Furthermore, the quick time to market

allows producers of substitute products to react to changing

customer needs and market trends. The majority of mutual

funds are benchmark products with no downside protection

and no guaranteed outcome. In addition, the flexibility of

mutual funds is partially restricted through portfolio and

capital constraints in comparison to other substitute products.

Especially in continental Europe, where banks dominate fund

distribution and at the same time develop and offer substitute

products, the efficiency of the fund product is crucial for the

asset management industry to compete against substitutes.

We have taken account of this key driver on the horizontal

axis on which we have indicated whether the efficiency of the

fund product can be improved to be more competitive against

substitute products (see figure 17).

European mutual funds and substitute products do not have

the same information and transparency obligations to make

them comparable for the end investor. EFAMA has pointed

out to these differences in a Key Investor Information (KII)

vs. Summary of the prospectus, pre-contractual information

and regular updating. Achieving a closer comparability of the

information will allow more even competition between the

competing products. This factor is demonstrated through the

vertical axis of figure 17 on which we have indicated whether

the transparency of the information provided to the investor

will be comparable or not.

 WHERE DO WE STAND?

Currently, asset managers face the challenge of matching the

efficiency of structured and other substitute products regarding

outcome and customer need orientation as well as time to

market. In addition, the differences in disclosure requirements

and fiscal advantages for funds and other investment products

adds to the challenges of asset managers in distributing

their products. These factors result in a relatively lower

competitiveness of mutual funds to other substitute products.

WHAT DO WE EXPECT IN THE LONG TERM?

A fair competition between mutual funds and substitute

products

We believe that, driven by investor demand, pressure to

differentiate from pure beta providers and the need to compete

against structured products, the asset management (especially

active management) industry will move towards more outcome

driven products. These will include absolute return, target-date,

LDI etc. Investors demand and sector competition will push the

asset management industry towards higher product efficiency

through investor centricity.

[16] Source: mtn-i

44

The demand of institutional investors will evolve from product-

driven, traditional asset class allocation models, to more

solutions-based advisory relationships with asset managers.

Institutionals will require managers to provide multi-asset

class solutions and risk management rather than single asset

class management. With the experience of two global financial

market crises over the last ten years and further ageing of the

baby boomers, investments with capital preservation and

upside potential will take centre stage with retail investors.

Within this scenario we will see the rise of aggregators which

will combine various asset management components to

provide solutions to end investors. The regulatory drive

initiated through PRIPs will be further developed by regulators

to provide comparable and transparent information as well as

a regulatory level playing field on packaged retail investment

products to allow for a sound and objective decision-making.

In addition to the regulatory level playing field and investor

driven product efficiency, the asset management industry

will also address the competitiveness and attractiveness of

mutual funds from a product manufacturer and distributor

perspective by offering innovative products which can compete

with substitute products in terms of time to market, fees, tax

and capital requirements for distributors. These forces will

provide for a fair competition between mutual funds and other

substitute products.

WHAT WILL BE THE KEY IMPLICATIONS?

Develop more solution- rather than benchmark-oriented

products

Asset managers will need to become innovative in combining

various asset classes and derivatives to deliver holistic solutions

for investors. This would require a strong customer centric

culture and flexibility in the product development strategy.

An ongoing dialogue and evaluation of customer needs

through market research and sales force feedback loop will

be crucial within such a strategy. Asset managers which cannot

develop the required skills in-house would need to partner

with financial solution providers who can deliver the required

components for the product.

Clear communication on differentiation to substitute

products

Within a competitive environment where the asset manager is

not only competing with other mutual funds for market share

but also with substitute products, combining the technical

knowledge of portfolio management and the communication

skills of a sales force will be indispensable for a successful

product placement with distributors.

Currently communication for instance on the level of investor

protection in mutual funds vs. counterparty risk in structured

products could prove advantageous. From an end investor

perspective a clear positioning as solution provider could prove

to sharpen and differentiate the image from other product

providers. For retail this could be done through clear brand

positioning in marketing and information materials provided

to the investors and within the advertising strategy.

Decrease time to market for development and deployment

of new products

In order to achieve a competitive advantage in new product

development it is necessary to set up a defined framework

that can bring new ideas to market faster than competitors.

The speed of new product development can differ substantially

among asset management companies with time to market

depending on factors such as product complexity, distribution

arrangements and organisational culture. Streamlining processes

from idea generation to distribution and ensuring these are

repeatable and reliable will allow asset managers to realise

revenues faster, increase market share and enhance brand image.

An integrated cross departmental team built up of research,

engineering, legal, marketing and sales experts would spur

innovation and ensure all obstacles of product time to market

are recognised and addressed at an early stage.

Choice of distributors where funds are complementary

products

Distributors within the asset management industry prefer to

offer complete product lines to cater to the various needs of

their investors and minimise the number of asset managers

that they have to deal with. Within such a scenario it will be

crucial for asset managers to choose distributors where the

fund complements the existing product line of the distributor.

In addition to innovative products this can be achieved

through a close relationship to the distributor allowing for

a clear understanding of the distributors’ needs, constraints

and targeted client segment. Tailored product development

for and white label offering to distributors could also enhance

the relationship and prove attractive for product placement.

IMPLICATIONS FOR THE INDUSTRY AND

REGULATORS

A first step towards a level playing field between various substitute products is set to materialise in short with the introduction of the PRIPs regulation. This will allow among others for a comparability of information and specificities of various products to the investor. However, the industry should endeavour to achieve further level playing fields in such areas as tax to ensure a fair competition between competing products to mutual funds.

45

46

The growth of social media from a leisure activity to a serious

marketing and information sharing medium may have a

potentially serious impact on the relationship between

individual investors and their financial intermediaries.

Avid social media followers are more likely to respond to

information, messages, advice and ‘tips’ received through

their online interaction than to engage a paid professional

– essentially becoming a ‘crowd’ investor, or an investor

influenced by the opinions of many others with whom they

have no personal relationship. Alternatively, they may simply

gather information to challenge their professional adviser(s),

necessitating a more informed client relationship.

The axes represent loyalty to adviser versus importance of

social media, where we attempt to chart the likely outcome

of this juxtaposition of established relationships and new

communication forms and norms (see figure 18).

Scenario Planninge-Investors

The growth of social media does not have an effect on the

decision-making of the majority of investors, and these investors

repeat the behaviour which has been traditionally seen in the

market and remain loyal towards their advisers and distributors.

Investors rely largely on the opinions of many strangers via social

media networks or business models to take their investment

decisions and are not committed to a specific financial adviser or

distributor brand.

Although these investors will access information from a variety of

areas, they will ultimately rely on their own personal judgement

for their investment decision and will not be influenced by brands

or social media.

Informed Investors

Business as usual

‘Crowd’ Investors

Independent Investors

HighLow

Advisers will be able to regain investors’ trust and the loyalty

of the investors will remain high. However, investors will also

use and leverage on social media and technological change to

collect information which will impact their choice of products and

relationship with financial advisers and distributors.

Loyalty towards financial adviser and distributor

Use

of

Soci

al M

edia

Hig

hLo

w

Figure 18

5

WHERE DO WE STAND?

Most of Generation Y who typify the growth of social and new

media have only just begun to reach the required affluence to

embark on their own investments. Also, the use of social media

and mobile applications in relation to investment decision-

making is still relatively low.

While a mass of financial information is currently available on

the internet, online brokers, bank websites and many other

sources, investors to date still remain sticky to their financial

adviser and the established relationship between the client

and the professional adviser continues.

WHAT DO WE EXPECT IN THE LONG TERM?

As Generation Y - particularly those born in the late Eighties and

onwards for whom global connectivity and information access is

taken for granted - begin to push through into a serious investment

demographic, we can expect a more informed investor.

These will be investors who will have used the web to advise

themselves of the basics of investing, including the differences

between products, financial instruments and risk/return

relationships. These investors will collect information through

social media and will leverage on it to have more informed

discussion with their financial adviser. However, we do not

expect a major shift in distribution models as there will continue

to be a cleavage between sophisticated investors and those

who rely on free advice via online sources and social media.

WHAT WILL BE THE KEY IMPLICATIONS?

Fund promoters will need to strengthen their presence within

social media

Although social media is not expected to be a ‘game changer’ it

can still be expected to form a major component of marketing

and information gathering for the investment industry,

particularly in terms of brand awareness and new business

prospects, but also for complementing existing communication

channels.

Distributors will have to become increasingly tech savvy

because this is what future clients will expect and demand.

Also, communication with Generation Y clients is likely to be

more nuanced and involved, as it will not be enough for firms

to disseminate product information. They will have to enter

into a continuous and live feedback with investors, gathering

information on product preferences and countering or

neutralising negative feedback. Social media may also assist

prospects and clients to get close to their Portfolio Managers

in order to better understand the investment philosophy and

monitor portfolio characteristics, potentially creating a cult of

‘Star Asset Managers’.

The ultimate goal for fund promoters is to have their reputation

strengthen directly by their investors.

“Social media is a good fit for us because it’s about relationship-

building. It’s one of our cornerstones. Everything we do is for

the client. If clients or prospects are having conversations about

topics, we want to be a part of that and offer our expertise or

understand the pain points.” Sheryl Larson[17], Vice President

and Online Marketing Manager at Northern Trust.

[17] Rock The Boat Marketing, Asset Managers And Social Media, Circa May 2010

47

48

Distributors will need to develop informative and interactive

tools allowing investors to compare and invest through

internet and mobile solutions, and also to exert more brand

control

Investment in a range of solutions, applications and platforms

will be necessary if the asset managers and distributors want

to control their communication and interaction with future

clients. For the more bespoke, specialised and typically higher

margin financial products and services, distributors will need

to be able to engage proactively with clients, developing

applications specifically for these products where possible

which can in turn give their clients the maximum of interaction

and performance access – and which distributors can own and

control. These applications will allow distributors to enhance

the client experience, track end-user activity, and create even

more scope for efficiency, planning and potentially greater

access to client funds. Through this increased interaction,

distributors will be better able to understand their clients’

desires regarding product development and optimisation.

However, future clients are also likely to want more control

over their investments, and distributors will be expected to

offer greater portfolio transparency.

Fund transparency will put pressure on price and margins

There will be a continued commoditisation of more

straightforward financial products, and these in turn will be

shifting inexorably to online platforms where rapid comparisons

will be made by investors based on any array of characteristics.

After product categorisation and historical performance, brand

recognition and reputation may be the only differentiating

factors.

For those product manufacturers that want to gain an edge

in what is likely to be a competitive market, sophisticated

and targeted marketing tactics will be necessary. However,

it is likely that in such a commoditised market, in many cases

price is likely to be the key factor. This can be expected to

drive down margins as market effects force a streamlining

of margins and fees. However, this is likely to represent only

one tier of the market. The more bespoke and sophisticated

products will resist commoditisation, and fund fees will not be

the differentiating factor. Instead, investment strategy, product

design and asset manager overall reputation are likely to remain

the key elements of interest to investors.

More sophisticated advice and expertise

The democratisation of social media is likely to increase the

level of investor’s financial education, or at least to make them

more aware of the available products and their characteristics

in the market. However, as the success of advisory business

models is predicated on the adviser having (a far) higher

knowledge than the client, if the increased specialisation and

sophistication of financial products continues, it will require

advisers of commensurate ability. It can be anticipated that

the knowledge gap between investors (particularly retail) and

educated, professional advisers will remain. However, this will

require increased investment in and by advisers to ensure their

personal expertise and sophistication remains high, and that

they are capable of responding to informed investors who in

turn would be more likely to remain loyal. As a consequence,

financial advisers will be required to be more qualified and

perhaps more specialised in order to engage in a constructive

and convincing discussion with their clients[18].

[18] See also PwC/CACEIS, Ideal Advice: A step-change in the industry’s relationship with the individual

investor, June 2010

49

Although enhanced communication is likely to impact on the

traditional relationship between client and adviser, it seems

likely that professional financial advice will continue to be a key

element in investment decision making. While Generation Y is

likely to be a more informed and demanding client, it should

not be forgotten that future financial advisers will also be drawn

from Generation Y, and combined with a sound education and

a universe of more sophisticated and specialised products,

professional advice will continue to command a premium.

What can be expected to change is the attraction and servicing

of new clients, and this is where a mastery of social media

and new applications is expected to be key in terms of brand

and reputation building. Also, growing innovation in new

applications for specialist products and services, combined

with an increase in more impersonal trading platforms, can be

expected to occur as features of future distribution strategies.

www.rethinkingdistribution.com

50

51

Conclusion

Rethinking

Distribution

52

ConclusionIn a future where competition is set to increase across

all accessible markets, segments and sectors, successful

distribution will depend on getting the basics right. The key

will not lie in developing exotic products which sound trendy

but rather to be tuned to the pulse of the customer and markets.

The success of the European asset management industry

in emerging markets will be dependent not only on a

comprehensive understanding of the local specificities but

also local presence, and promotion built on the fundamentals of

solid product performance. In specific local markets, partnership

with local knowledge will be crucial in overcoming regulatory

and cultural barriers. The European asset management industry

is currently at a crossroads. Should the industry allow for

distribution reciprocity, or at least an interactive dialogue with

selected emerging market regulators, when developing future

regulations? Or should the industry risk the threat of losing

the dominance of UCITS distribution in these markets in the

long term future?

Similar relationship building qualities will be in high demand

with investors. While future investors are likely to be more

challenging and skeptical of financial institutions in general,

good personal relationships will rise above these reservations

and can create a resilient client base who are more likely to

remain with a trusted adviser through a downturn. To gain

such a client base, product manufacturers will have to work

closely with distributors in order to create products optimised

for specific channels and market segments. While returns will

obviously be a major factor, strong client relationships cannot

be underestimated.

A sector with less surety is the area of pensions. While it is

certainly technically possible for the asset management industry

to create products in partnership with insurance entities that

will better satisfy the requirements of mass retirement income,

much depends on the development of government policy

in the area. However, it appears likely that the trend toward

more and more private schemes is inevitable, and these new

flows should open the market sufficiently to allow the asset

management industry to be proactive in offering solutions,

rather than being reactive.

 

Similarly, the competition with substitute products also has the

potential to be market changing. While a more level playing

field between substitute products and traditional investment

products may occur, a greater challenge would appear to be

achieving the increased specialisation which can deliver on

the wants and needs of a more objective oriented market.

The asset management industry will need to be willing to

employ efficiency and innovation to create products that can

exploit these opportunities.

Higher sophistication of advisers, greater transparency for the

client and increased interaction with customers will also be the

factors of success in a world where investors will rely more on

social media to discuss and decide on financial matters. Even if

institutions rely on social media for nothing more than brand

protection, they will need to become adept in its use.

Although there is no silver bullet for success, the concepts

discussed in our scenarios should equip asset managers and

fund distributors with the main ideas necessary to offer their

investors a new experience of the fund industry. This new

experience can be summarised in four main points:

52

53

INVEST IN RELATIONSHIPS

Keeping a close relationship to the distributors, investors and/or

emerging market players will allow for a better understanding

of product and service needs, preferences, constraints and

changing market trends. Combining the technical knowledge

of portfolio management and the communication skills of a

sales force will be indispensable to a successful distribution

strategy. This has been illustrated by the recent success of

some European boutiques in which marketing and sales teams

account for approximately 50% of their staff.

Invest time, especially with pension funds, insurance companies

and “informed investors” (through social media) to offer adequate

answers to daily queries but also proactively provide relevant

and timely information on market fluctuations and investment

decisions. This will allow asset management firms to build

trust and to position themselves as a privileged interlocutor

and provider.

SHARE AND COLLABORATE

While a good relationship to the distributor and the investor is

vital, asset management firms should be able to listen to and

capture client feedback. This will allow them to develop and to

deliver successful products in a timely manner. Organisations

must be based on a strong customer centric culture with

ongoing dialogue and evaluation of customer needs through

market research and sales force feedback.

Asset management firms and associations should also provide

increased education materials and training to both investors

and advisers, with a short-term emphasis placed on increasing

the capability of financial advisers.

With globalisation and rise of emerging markets it will also

be extremely important to allow for equal opportunities

between the mutual funds of these regions. This may include

cross distribution, close collaboration with the regulators of

these regions and the integration of their views within future

regulatory developments of EU fund frameworks.

The asset management industry should draw on their

relationships with distributors and investors and cultivate

ongoing feedback to discover opportunities for new products.

A bottom-up approach to product development and selection

will ensure that their funds meet the needs of future clients.

With increasing moves towards solution-based products, the

asset management industry may not always be in a position

to deliver the required product internally. In such cases the key

to success will lie in the ability to team up with other financial

solution providers to deliver bespoke products meeting the

needs of specialised investors.

ENHANCE VALUE THROUGH QUALITY

The most sophisticated and comprehensive distribution

strategy cannot be successful if the product fails to deliver:

Performance: even though price sensitivity may differ between

countries, products and investors, the key driver of demand will

be performance;

Value-for-money: a strong customer centric approach in the

product development process will maximise benefits for

the investor in the most cost-effective manner. As such, the

cost of daily NAV reporting, monthly factsheets, etc. arguably

produces little in the way of concrete benefits to the investor

of retirement products;

Safety: EU-domiciled funds, especially UCITS, enjoy a

worldwide reputation for regulatory integrity and security.

The fund industry should ensure that this integrity is

maintained, as well as building a comparable level of trust

in AIFM.53

54

Of the same series

Ideal Advice - June 2010

A step-change in the industry’s relationship with the individual investor

Within this report we examine the state of play of financial

advice within Europe and provide a set of key recommendations

which we believe are critical to enhance the overall quality

of investment advice. In our view, now is the time for our

industry to take bold and convincing steps and an active role

in achieving a business model that is both sustainable and

investor centric. Available also in Spanish.

Ideal Fund - June 2009

Reengineering the fund value proposition

This paper takes an investor-centric approach to examine the

mutual fund value proposition and outlines recommendations

for governments and the industry to promote sustainable

solutions that will serve investors. The focus is on the long-term

investment goals of European retail investors.

Idea

l Advice

A st

ep-c

hang

e in t

he in

dustry's re

lationship with the individual investor

June 2010

Ideal

Fund

Reeng

ineeri

ng th

e fun

d valu

e pro

posit

ion

June

2009

François Marion

CACEIS, Chief Executive Offi cer

francois.marion@caceis.com

+33 (0)1 57 78 0110

Arianna Arzeni

CACEIS, Senior Market Research Manager

arianna.arzeni@caceis.com

+352 47 67 2024

www.caceis.com

Marc Saluzzi

PwC Luxembourg, Financial Services Leader

marc.saluzzi@lu.pwc.com

+352 49 48 48 2511

Dariush Yazdani

PwC Luxembourg, Director of Financial Services Research Unit

dariush.yazdani@lu.pwc.com

+352 49 48 48 2191

www.pwc.lu