Distributing Funds In The Digital Age

In the last decade the banking industry has made tremendous efforts to digitalise its services. The investment industry has been slow to catch up, but has begun to find its footing with robo-advisors making a loud entrance.

But what about funds? Have you ever invested with your smartphone?

Funds are mostly sold to retail investors via distributors (e.g. banks or financial advisors) that receive commissions on the volume of fund sales—but this model incentivises distributors to push funds with high commissions to retail investors instead of searching for products that suit their needs best.

Thus, the European Commission has decided to put an end to this system with the MIFID II directive, which bans the payment of commissions to independent advisors. This represents a real paradigm shift for fund distribution. But it also brings some unintended consequences: independent asset managers (i.e. those without a proprietary distribution network) will face a more challenging environment in which to distribute their funds; and banking institutions with an in-house asset manager will close their product range to become dependent, if they haven't already—this allows them to continue receiving commissions.

Selling funds via mobile apps

In this context, some independent fund houses dream of directly reaching final investors by digital means such as mobile apps. I.e., e-distribution.

Unfortunately, this is not as simple as it sounds. First, for average customers, asset managers are virtually unknown compared to the familiar bank names. Building a strong brand name is thus essential to get in touch with final investors. A similar transformation has been observed in the pharmaceutical sector, for instance, which also used to be a B2B-industry with low brand recognition by patients. With massive marketing campaigns, these companies have succeeded in drastically increasing brand awareness.

Secondly, operation costs must be significantly cut. Large amounts of money per transaction have made the transaction cost bearable for investors. E-distribution would bring a higher volume of transactions with much lower amounts. The current cost structure risks making e-distribution unprofitable. We see AML/KYC and order processing as two areas where costs might be cut.

Digitalisation of the back office

Heavy AML/KYC procedures need to be automated and made paperless. Indeed, solutions are already available: mobile solutions, for example, prompt an investor to take a...