Platform View: Retail fund management is being dismantled

There’s a lot of stuff going on in retail asset management. A serious load of stuff.

Whether it’s FCA chief executive Martin Wheatley looking for more transparency or the rampant growth of index-tracking (in whatever form) or the truncated ability to pay product providers (or fund supermarkets) for distribution, the sector has a lot to think about.

And that’s without even mentioning the move to clean share classes or the related discussions (if little demonstrable substance) about ‘super clean’ or discounted clean share classes.

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On this point, recent meetings with retail asset managers suggest that the various groups are uncertain how to proceed. Some groups have rejected differential pricing in any form, believing that such a move will accelerate a ‘race to the bottom’ on price.

Other groups have been less definitive but it seems that none will offer superior terms except where outlets (including platforms) can claim to influence flows.

PS13/1 has gone further than ever before in dislocating the previous relationship between fund managers and platforms and encouraging advisers and clients to consider a broader range of asset solutions. It has substantially increased the due diligence obligations of advisers, not least in the key area of sniffing out investment bias as part of the platform selection process.

Key to the ‘super clean’ outcome is that on one hand platforms are claiming (to asset managers) that they are able to influence flows (and hence ‘deserve’ super clean terms) while on the other they are in complete denial of the same so that advisers might fulfil their more onerous due diligence obligations. Seems that someone somewhere is being a little economic with the truth. Advisers might want to ask for the basis of any discounted pricing arrangements to make sure they are not exposing their business unnecessarily.

And here’s another threat. When we launched Nucleus, we wanted to be big on model portfolio capability because we believed that if a Nucleus user was able to ‘sack’ an underperforming fund manager (with client consent), that should radically improve the accountability of asset managers.

I don’t think we’ve yet reached a point of full transparency on this but I do believe that since the introduction of this concept, retail asset management has been edging along a journey to a very different place. In moving asset allocation closer to the customer (in many cases under the guidance of advisers), model portfolios have reduced the role of retail providers to that of component suppliers – as managers have become distant from the end investor, their challenge has become akin to that of a segregated portfolio manager.

Ultimately what’s actually happening is that financial planning is driving the sector away from running a product-led transactional model toward offering a client-led service model.

This is much more akin to institutional fund management which has long-since rejected a supply-push sales effort for demand-pull market. What this means is the raison d’etre of retail fund management is being dismantled and will need to be reassembled to much more closely resemble its institutional cousin.