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Volume 1, issue 1 · Connectivity The EY global distribution review Volume 1, issue 1 Rise of the...
Transcript of Volume 1, issue 1 · Connectivity The EY global distribution review Volume 1, issue 1 Rise of the...
ConnectivityThe EY global distribution review
Volume 1, issue 1
Rise of the machines: electronic platform distribution
Connectivity
Introduction to ConnectivityThis issue of Connectivity
a new EY thought leadership series focused on global funds distribution. Future issues will each concentrate on
a different aspect of the complex distribution equation. Connectivity won’t necessarily offer exhaustive answers or comprehensive solutions. But we will seek to raise important points of discussion, highlight key trends in the global distribution of funds, and examine where the industry is headed and how we think leading practices can be implemented.
A large portion of the wealth and asset management business model — particularly relating to operations, risk management, technology infrastructure, client reporting and portfolio management — has been addressed from a cost management perspective over the past decade. True growth will likely be achieved only through a
Further, a rich landscape of vendors providing an exhaustive range of services, from marketing and compliance to quantitative analytics and data management, has developed extensively in recent years. The crucial function that generally
Whether from a technology standpoint, looking at the rise of electronic platforms, or from a regulatory standpoint, looking at the restructuring of remuneration models and client interaction, fund distribution is undergoing sweeping changes. For the industry, several major challenges, such as the restructuring of the compensation model, must be addressed.
Connectivity looks at these many challenges, highlights the key issues
take to succeed at distribution globally.
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• Electronic platforms are slowly but inevitably becoming a vital channel in global funds distribution. Few asset managers can afford to continue using distribution models from
entrenchment, as well as those that offer only limited investor options.
• Interaction between counterparties to exchange information and securities via electronic platforms is nothing new in
wealth and asset management industry
services sector to fully leverage the power of rapidly expanding technology and
transactions. Instead, distribution in most asset management markets has focused on personal intermediation with little attempt at true innovation.
• Part of the slowness in adapting to new distribution technologies and business practices has been due to the entrenchment
models that left little incentive to radically change the system. But widespread regulatory reform of pricing models is now sweeping the globe, notably the Retail Distribution Review (RDR) in the UK and Markets in Financial Instruments Directive II (MiFID II) in the European Union.
in the industry. Thus the stage is set for more distribution to move toward electronic
intermediation.
• Fund distribution platforms and their respective rates of growth vary widely from market to market — as does even the mere
industry may be thinking globally in terms of
must act locally to customize and leverage the platforms used in individual markets.
Executive summary
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• Perhaps the most advanced markets for platform distribution are the UK and the US.
the late 1990s, a massive disintermediation process began that moved investors away
At the other end of the development scale sits Continental Europe, where universal banks still control the bulk of the distribution life cycle, and platforms primarily serve a
facing advisors.
• A successful platform distribution strategy will require an aggressive and thoughtful leveraging of social media, commitment to building brand identity, a comprehensive investor education program and a high degree of personalization and enhancement of the client experience. These drivers will help to address the key challenge of product differentiation — as well as build customer relationships.
• Given the continued investment in technology and automation of processes, the growth of platform distribution will inevitably squeeze pricing and margins.
largest global managers that can build economies of scale — can attempt to enhance or at least protect some degree of pricing power, particularly through investment in customer experience and building brand
of lower margins and increasing market
competitive pricing.
Rise of the machines: electronic platform distribution | 5
0
1,000
2,000
3,000
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5,000
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TreasurySecuritiesPayments
November 2014 YTD2013201220112010
3,975 4,378 4,529 5,005 5,064
Issue 1 — October 2015
I IntroductionAs far back as 1973, during an era when paper forms were physically passed from bank to bank and across vast geographical distances, representatives from a consortium of banks met in a
beginning of what is now one of the oldest and largest electronic platforms
for Worldwide Interbank Financial
a shared worldwide data processing platform and messaging link, along with
standardized terminology for international
payment processing and, more recently,
established an automated quotation
also entailed standardized terminology
of the capital markets industry was only marginally interested in the then-
narrowed the bid-ask spread of securities
paradigm of securities trading that had
that the most effective model was one of face-to-face intermediation between a buyer and a
data and transact payments for natural gas
6 | Connectivity October 2015
trading, announced its acquisition of the
rapidly losing market share to the global
monument to capitalism — a manifestation of what was believed to be the utterly essential process of physically connecting
Open outcry futures trading has fallen to just 1% of the company’s total futures
stunning architectural monument of
management industry is essentially a
information backed up by a payment
been rebuilt several times over the last
rebuilt from scratch to keep up with
growth of computer processing power and telecommunication bandwidth, along with the corresponding collapse of the marginal cost of that power and
bandwidth, has completely reshaped the
business model in many areas of banking and capital markets is effectively creating a cross-border electronic platform and then leveraging it to win new business and
and securities trading have rapidly moved
the asset management industry has been
crisis, investors have often been left less than
time, they are increasingly well-informed about products and prices, have far greater
before and are now largely comfortable
industry, like it or not, will shortly see the inevitable rise and dominance of electronic distribution platforms — alongside an
Rise of the machines: electronic platform distribution | 7
Megatrends driving the rise of the machines
Screen-based automated
trading
Customer experience customized information delivered via the web over a personal meeting with
Regulatory reform
Investor dissatisfaction
Investor sophistication
and transparency
Investors, both retail and institutional, have far greater access to and
transparency is shining a bright light on what was once a highly opaque
Technology infrastructure
II The stage is set
distribution model in asset management was no doubt the entrenchment of an
distribution chain and were not transparent
their asset management services and what precisely they were getting for that
laid the groundwork for the growth of
infrastructure, greater transparency of information leading to far greater elasticity of pricing, regulatory reform and, ultimately, market preferences have all combined to form the perfect
increasingly directed in one form or
jurisdictions, the traditional role of the intermediary distributor will shift from one of a commission-incentivized seller
of product, with marginal regard for the cost of that product, to a new role of sophisticated buyer acting on behalf of
market well, client-facing distributors will implement their purchasing decisions in much the same way a savvy supermarket
decisions will be based on quality of products, brand name recognition,
generate vastly greater revenues than boutique shops, the most rapid growth in platform distribution will likely be seen in
platforms in operation today offer choices from multiple asset management product
of these platforms, the advisor community and the platforms themselves will likely
appearance that their platforms are a
Investment platforms will also become increasingly important compliance tools in the face of increasing regulation to
Issue 1 — October 2015
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Rise of the machines: electronic platform distribution |
protect consumer interests, such as the
Already, institutions are being required to check that any advice given is suitable, in the best interests of the client and not
offer built-in rules to prevent advice
automation of the compliance function will allow more resources to be devoted to
only the disintermediation of traditional
facing advisor will soon shift from a seller
Advisors, such as private bankers, may also want to move up the value chain and start offering customized portfolios by putting together a strategy based around
often owned by independent technology companies and offering services similar
show signs of cutting out brokers and fund managers completely, as well as changing
whether retail investors or client-facing advisors, to use more digital channels to
to deliver more options, more services and more information to clients and keep pace
mindset is fully embraced on an enterprise-
challenge, given that key stakeholders in
often built their careers working within
of funds via the platform channel to Asian investors will likely outpace the growth of the platform channel in the UK or
the rapid and growing rates of broadband market penetration, smartphone-based e-commerce and highly sophisticated investors who are becoming increasingly skeptical about the value provided by
Change is under way in AsiaIn Asia, most wealth management services are delivered by the universal banks, with more than 80% of funds sold face-to-face, in formal meetings through large institutions. At the same time, buying behavior is mostly performance-focused, with investors chasing high returns and advised through personal intermediation.
However, the high rate of D2C platform adoption and use of mobile technology in Asia suggests this traditional distribution model is likely to be disrupted. According to data from US-based Forrester Research, 83% of Chinese customers use mobile applications to bank online, and 73% use mobile applications to invest online.
Europe
is characterized by a closed architecture, with banks and insurance companies being the dominant players selling
includes countries such
UK is at the other
completely open architecture and investors having a whole range of distribution channels to choose
are several countries
that lie somewhere in Open architecture is prevalent, and growing, despite banks being the biggest
Latin America
In Latin American countries, banks own a major portion of
that the entrenched distribution patterns
North America
done through open architecture, and the entire range of distribution channels is available in the region,
advisors, brokerage
companies, fund supermarkets and direct
are done through the
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III Regulatory change drives restructuring of pricing model
model in many jurisdictions inevitably will also force asset managers and distributors alike to aggressively improve
As client-facing advisors can no longer be directly incentivized through revenue sharing or commissions, the industry
channels to deliver more information
an entire class of investors — those with limited savings — may effectively be left on
advice, and thus will likely be drawn
overhaul the entire remuneration system within asset management distribution
debate about transparency of total fees paid by clients began over a decade ago,
marked the end of a painful process for
process had begun as far back as the late
all, investment advisors should disclose
remuneration system for advisors was a
disclose and separately charge clients
clearly describe their services as either independent — thus entirely free from any
any product line — or restricted, where a connection or preference toward a
client-facing distributors is that they can no longer accept commission payments or revenue-share payments — in fact, any payments — from asset managers for
distributors must be paid directly by the clients for the advice given — and only by
also implemented a ban on inducements, which are the fees paid by asset managers to induce salespeople, investment
selling investment products to promote a
by regulators about how the established suitability standard that governs the
advisor and investor should be heightened
already applies to registered investment advisors, who are regulated under different
Issue 1 — October 2015
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Rise of the machines: electronic platform distribution |
complicate the regulatory outlook, it is unclear whether the proposed changes will apply only to pension and retirement
Wide-sweeping regulatory changes
what may prove to be one of the most groundbreaking legislative changes of the decade for the industry, the
implementation inevitable throughout the
now introduce the necessary national rules
for standards of investor protection,
client-facing distributors will be the shift away from a sales commission-based model
the business development and distribution
• advisors or discretionary portfolio
managers accepting or retaining payments/inducements — effectively banning payment or retention of retrocessions or commissions to or by independent advisors or managers for distribution
• Regulatory powers to ban products — likely to lead regulators to increasingly focus on product development, oversight and targeting of products
• and appropriateness, particularly in
•
and loss analysis, but also potential regulatory issues
Although the jury is still out on the
managers and distributors, some critics have argued that small and midsized asset managers could see new business
result of shifting consumer demand, more transparency in pricing and the shrinking
landscape will be that a large number of smaller independent advisors will disappear — with the likelihood that more business will be directed toward larger advisors and those innovative and nimble enough to adapt to the new environment through aggressive
industry in general, the squeeze will be on
digital platform distribution channel and leverage immense economies of scale to
toward strategic mergers and acquisitions as a means of rapidly adding or combining
acquire a small technology startup in order to rapidly gain cutting-edge sophistication in electronic distribution
Further, as asset managers try more aggressively to build brand identity, enhance market share and capture client wallet share, they are vertically integrating into the retail market by hiring more client-facing advisors, but not to act
targeted not so much to directly distribute funds, but rather to help educate investors about the product line and in
Increasing share of UK platforms in retail sales
Year Total gross retail sales (million)
Direct sales*
% of gross retail sales UK fund platforms
Other intermediaries
37%
11%
11
Article header
IV Today’s landscape of electronic distribution platforms Globally, the asset management industry is seeing several broad business models emerging in platform distribution: Insurance channel —consists of insurance-based platforms and is centered primarily in the UK, Australia,
geographies, the vast majority of investors get their investment advice from insurance
Fund platforms in these markets have
of the brokers who are actually placing
Advisor channel — the second cluster
advisors employed by the large wire houses, as well as by independent
management discussions with private clients usually gravitate around equities, so the starting position for these platforms is
strong emphasis on trading and portfolio
wire houses or independent registered investment advisors, largely turn to some
largest global asset managers distribute a majority of their registered fund products
Private bank channel — the third
distribution of investment products has
E-platform acronyms
Platform model
B2B
B2B retail
Closed architecture
Open architecture
Guided architecture
A platform that may appear to be open architecture in that it offers a large number of products from a very wide range of
D2C (or B2C)
Advised platforms
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Issue 1 — October 2015
Article header
Rise of the machines: electronic platform distribution |
connect asset managers with client-facing advisors have evolved to support multi-
invest in domestic and international listed securities, managed funds, derivatives,
For some time, these general clusters
technology is maturing and enabling more functionality, and technology providers are integrating their services on a global scale, the platforms dominant in one market
previously seen only in platforms in
software development, market forces are pushing private banks toward ready-made solutions offered by a handful of global
new software, asset management service
off-the-shelf vendor packages can deliver fully comprehensive wealth management
software vendor landscape, off-the-shelf packages should also become increasingly
of disintermediation and margin pressure
Investors across the spectrum, including
of private banks, will eventually start
what most automobile buyers do when
will be no set boundaries establishing who
an online insurance sales functionality and
multimillion-dollar investment accounts
Rapid and tumultuous paradigm shifts for any industry are by nature highly unpredictable, even by the most prescient strategy consultants. Engrained corporate culture, to use the Peter Drucker cliché, eats strategy for breakfast.
based cameras dominated the global photographic industry, much of the original technology behind digital photography was invented and patented by the world’s largest photograph companies that controlled an oligopolistic consumer wallet share of the global market. Digital imaging was a fascinating science, but key stakeholders of
had been invented nearly a century before. Now, some two decades
widely displayed in museums but
retail market, apart from antique shops. Those corporations that once controlled the photographic industry are nowhere to be seen on the list of the winners in digital photography.
Similarly, in the global telecom industry prior to deregulation, large network carriers held tight control of consumer wallet share, in no small part due to their frequent status as former publicly owned monopolies. No doubt, the network carriers certainly dabbled in wireless technology back in the early 1990s. Nonetheless, the new fad was widely seen as little more
than expensive toys for well-heeled executives in chauffeur-driven limos with a penchant for James Bond gadgetry. Today, many of the once-giant network carriers have emerged from some sort of forced restructuring over the last decade and are nowhere to be seen in the top tier of the wireless industry. Many of the biggest winners in wireless technology did not even exist in the early 1990s or emerged from unrelated industries such as shipping or software.
In the decidedly unglamorous low-growth industry of fast food, a decade ago the conventional wisdom, engraved in stone, was that the basis of successful growth was to spend heavily on TV advertising and offer rock-bottom pricing and steeply discounted loss-making offers intended primarily to drive
Today, the fastest growing fast food chains and the darlings of Wall
exist a decade ago, have spent nearly nothing on TV advertising, offer no discounts and have set a pricing point at the very top of the market. The lines to enter these new national chain restaurants are often
consider them “fast food.”
The new global leaders in all of these industries have one trait in common; they long since took the granite tablets upon which conventional wisdom was once engraved, tossed them all aside and never looked back.
Embrace radical change and reinvention to survive and grow
Direct salesApart from the platforms that serve client-facing advisors, the highly entrepreneurial
business model was born during the great
as a number of new websites began offering
the world of consumer-focused investment platforms offers a far more robust client
13
investors turn to platforms to purchase funds
highly robust platform, call center support and even some degree of an automated electronic functionality, through what are
and offer purely third-party products, or they
| Connectivity October 2015
Platforms now dominate the UK fund distribution market, which has led to a state of ongoing evolution,
UK distributor Web address Minimum monthly investment
£
£
£
Bestinvest £
£
£
directed-service £
php £
£
£
£
Fundsnet
£
Interactive Investor
isa £
iWeb £
£
£
£
rplan £
£
£
youinvest
£
invest/home £
Willis Owen £
their own asset management products and
internet websites — that hold no assets and operate more in the telecommunications-
In theory, the direct sales platform is the nirvana for asset managers, with the direct placement of fund products being the most
the largest national or global asset managers
14
can command the budgetary resources, operate professionally staffed call centers
platform distribution, technology is conquering the world, and the result is
created purely as independent technology vendors are now starting to compete directly for a certain segment of the
nontraditional entrants include new stand-alone, independent websites that
Additionally, established global internet search engine providers could soon enter
identity, massive economies of scale, technology infrastructure and deep pockets
fund distribution process as primarily an
be that few investors yet associate internet
In terms of where this convergence of platform models from one market to the
handling multiple asset classes, not just
tangible property, cash, alternatives and
platform convergence means the future of wealth management across the global
household, with a holistic wealth package designed to meet the desires, preferences
is driving toward a convergence of the distribution of investment, retirement, insurance, lending and deposit products
Rise of the machines: electronic platform distribution | 15
The present marketplace: crowded, complex chaos
globe today offer a plethora of funds on the shelf, but most of the funds listed are
most aggressive in terms of national
platform channel — as has often been the case when working with a network of
Instead, asset managers must aggressively support their product lines through almost any means short of commission-based compensation models in cases where
electronic platforms to the buyer, whether that buyer is a client-facing advisor, a private banker or a retail investor, will intensify
Buyers are increasingly willing to invest time
products on the shelf will mean that brand names that are not relatively understood by the market will lose the buyers’ attention in favor of product lines that asset managers have invested heavily in developing and
effectively communicated and branded within the marketplace should align with investors’ personal preferences, be delivered at low cost for the given level of service, offer investment performance tied to outcomes and support the asset managers’ market
further highlight another key challenge
Advisors often cite the endless supply of products from asset managers with a near
asset classes, such as large-cap active
establish product differentiation through
space that electronic platforms present to investors, often leaving them confused for choice, will necessitate product differentiation in a way that is different and that resonates to client outcomes not
rather than merely marketing short term performance will be a key to differentiating
comparison, most users of automated
video streaming services, come away
needs were met and they received a
matchmaking internet dating sites, once a taboo subject but now a mainstream sitcom
that then transmits binary code through
friend or professional advisor, however personable and knowledgeable, is not at all
It has been all too common for asset
If the technology sector happens to be in the headlines over the last month, product distributors are all too quick to discuss the range of technology-focused funds and the latest and greatest tech fund
will increasingly turn to planning toward
shares — and pay management fees — for a target-date fund perhaps for decades into
date funds have learned the need to simplify
purpose of target date funds to ensure the market truly understands the product and
distribution platforms do not merely communicate characteristics of the hottest-
investor with a more holistic perspective focused on individual goals and personalized
| Connectivity October 201516
Issue 1 — October 2015
Rise of the machines: electronic platform distribution |
V EY predictions for the future of electronic platform distribution • The status quo is not an option.
Restructuring of pricing models due to
a vastly more educated, sophisticated and informed investor base make the rise
managers that relied purely on their past market position and traditional sales compensation models will be aggressively
will require substantial adaptation to the growing segment of investors moving away from personalized intermediation solely and toward electronic platforms to support and transact their investment
• Think global, act local. decades of increasing globalization, standardization and harmonization, the asset management industry still remains highly fragmented in terms of individual market structure with
A successful platform strategy in the UK
fragmented and differentiated from country
ability to interface according to geographic and demographic market segments, as well as their ability to customize the individual investor
market and customer segment strategy is a
not prevail; targeted investment and focus are
• Less is more. Asset managers will be forced to review their products and relationships distributed via the
support for fewer products will lead to better preservation of margins, enhanced competitiveness and greater
but deeper relationships, from both the manufacturer and the distributors’
• Multichannel strategy and the cannibal. will look at platforms and their distribution
product sales through an electronic platform may come as a result of a loss in sales
decisions will need to be made to determine
of, an omnichannel approach will test the resolve of industry participants but is
• Think the unthinkable.potent competitors in the funds platform
industry and have no background or
ventures or even a strategic acquisition of the most promising tech start-up — as well as a complete rethink of the primacy of
online investment advice portal, has grown from start-up to break the $1 billion
in years past, the fastest growing and aggressive start-ups in traditional brick-
taken over twice as long to surpass the
market’s interest in an electronic platform
• Millennials … lacking trust, yet liking technology.
or seeking employment, they vastly prefer an online interface for making spending decisions — far more than any face-to-face
many major banks have downsized out of the investment advisory business as the key millennial market segment simply went online to purchase funds and eschewed bank
proactively address this client segment now,
• Personalization and enhancing the client experience. In the eyes of many investors and advisors, there is limited product differentiation in the asset management industry, the trend of commoditization is well-established, and all platforms provide
seek to allocate their time and assets to the distribution channel where they feel they
themselves with a rich offering of content,
transparent pricing, digestible market news
In the US retail distribution markets, still tightly dominated by client-facing advisors, several new web-based entrants are successfully gaining traction in electronic platform-based automated advice, offering low costs and high transparency:
Automated investment platform
AUMs Products and services
Financial planning
Account aggregation
Asset allocation
ETFs
Individual stock
Single stock
Autom
ated rebalancing
Autom
ated deposits/transfers
Dividend reinvestm
ent
WealthfrontBetterment
Future Advisor
17
| Connectivity October 201518
ContactsMichael Lee
Leader
Alex Birkin
Advisory Leader
Rafael Aguilera
Advisory
Paul Stratford
Theodore Kim
Jeroen Buwalda
Advisory Leader
Juan Carlos Lopez
Rise of the machines: electronic platform distribution | 19
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