about 10 percent of assets under management in the European Union,
should increasingly become targets for acquisitions as large
players seek to build their penetration of local client
segments.
Strategic moves by institutions such as Deutsche Bank, UBS and
insurer Axa in recent months point to an increasing desire to
penetrate the independent financial adviser (IFA) sector and
acquire greater access to an investor base, particularly in the
mass affluent segments. The alternative of building a stand-alone
distribution network in key economies to access these investors is
far too expensive for most players, according to industry
experts.
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The substantial mass affluent client base that has been built
by the IFA industry over many years “is now seen as an ideal
addition to the banks’ own list of clients”, Cerulli Associates, a
US-based wealth consultancy, says.
Indeed, the IFAs’ substantial mass affluent base can help to create
significant economies of scale in distributing products to a wide
range of clients, it adds.
At the same time, European fund managers are also expanding their
interest in IFAs in a bid to return to their distribution
roots.
In a new research note on the IFA industry, Cerulli Associates
estimate that one-third of total European retail fund net sales in
2005 was made through independent and tied advisers.
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By GlobalDataTilney deal
Recent transactions to build up distribution at a local level
include Deutsche Bank’s acquisition of Liverpool-based Tilney
Investment Management, providing its new German owner with
distribution reach in a large and lucrative private wealth
management marketplace that is becoming more open to offshore fund
promoters. Citibank’s purchase from Morgan Stanley of UK wealth
adviser and brokerage Quilter was driven by much the same
aims.
Despite possessing a considerable tied salesforce, UBS recently
announced plans to boost its profile with UK adviser networks.
French insurer Axa has also revealed plans to reorganise its UK
operations, singling out financial advisors as a primary lever to
reach its long-term revenue goals.
The push to target wealth management products and services via
independent or semi-independent financial advisers is not confined
to the UK – nor to the mutual funds industry, Cerulli
observes.
Italian insurer Generali has just reported that in its home market,
a fall in premium income from the bancassurance channel was offset
by individual adviser sales, mostly of single-premium, unit-linked
products. In Germany, fund manager DWS’s relationship with Dvag –
the country’s largest network operator numbering more than 30,000
advisers – has enabled the latter to offset its declining bank
sales.
Cerulli analysts say this marked step-up in interest in the IFA
channel is in part because European banks “are realising that
further penetration of the mass affluent segment requires a more
sophisticated and less dogmatic approach than previous attempts at
organic growth”.
Superior performance
Fund managers, for their part, are also interested in IFAs because
when bank-controlled distribution architectures have been closed,
individual advisers often provided the sole means of building
profile with retail customers in the local marketplace. By
demonstrating superior performance and specialist expertise,
non-domestic managers were able to leverage IFA distribution to
gain entry to branch banking network shelves.
In the aftermath of the dotcom bubble, and fuelled by innovative
features, dominant bank distributors have experienced a high demand
for principal-protected structured products. It is a demand that
most banks are happy to accommodate, given that they are able to
command strong revenue streams from these in-house vehicles,
especially in periods of market volatility, without the need for
unwieldy advisory tools, Cerulli notes.
To compensate for the banks’ decreased attention to mutual funds,
even those produced by their asset management subsidiaries,
cross-border promoters, along with a growing number of their
domestic counterparts, are reviving their marketing efforts in
alternative channels such as IFAs.
“IFAs in particular are seen as a key means by which to regain lost
profile,” say the Cerulli researchers. “It is also hard for fund
promoters to ignore growing investor complaints about mutual fund
mis-selling, and the push for the provision of unbiased advice
coming from European Union level down to national
regulators.”
At first glance, such renewed reliance on small advisory firms
could be seen as a backward step. The big wealth management
players, after all, continue to focus on securing bank-channel
distribution – a critical success factor in Europe, Cerulli
admits.
Since dominant bank distributors have opened up to third-party fund
promoters, the level of assets managed by groups lacking captive
distribution has risen considerably.
So too has profitability – despite the fact that banks have
succeeded in winning larger portions of commissions and trail fees
than those commanded by individual advisers. This is because
promoters are able to match lower fees with lower marketing costs.
Large amounts of marketing dollars, previously given over to often
far-flung and independent networks, can now be saved in the face of
more centralised distribution hubs.
Captive distribution
In reality, though, Cerulli asserts, the independent advisory
sector “was never truly abandoned by promoters lacking captive
distribution in the local marketplaces”.
The drive to pitch funds, especially to wealthy investors, has
worked to preserve relationships, and advisors have increasingly
built their base of clients in the dawning of the provision of
fee-based advice within many European markets.
Nonetheless, advisers are facing more regulatory pressure to
deliver unbiased advice. They are also being forced to take more
responsibility for the products they sell. The implementation of
the EU’s Markets in Financial Instruments Directive in November
will only strengthen the trend as financial advisers “seek to push
responsibility for manager selection upstream in a bid to limit
their regulatory risk”, Cerulli reckons.
Its analysts believe the overall effects of such pressures bode
well for cross-border fund providers and European players lacking
distribution captive affiliates.
