With MiFID II around the corner, now is a good time for asset managers to re-think their approach to distribution.
When MiFID II goes live on 3rd January, it will be the first time regulation requires people to be more vigilant about where their funds are being sold, and who they are being sold to.
Traditionally, it would have been more of a paper exercise based on the content of legal contracts between asset management companies and their third party distribution partners.
Asset managers typically signed distribution agreements with a third party institution, who would promote and sell the asset managers funds via their sales network to their clients. However, it was not common practice to check or validate that who was buying the funds, from where, that the appropriate share classes were sold to the right investors, or indeed whether the appropriate amount of commission was being paid as remuneration to those distributing the fund(s).
Effective checking and oversight of distribution partners by asset managers has simply not been a regular, detailed process.
MiFID II is set to change that.
Asset managers will benefit from having a clear, unified view, from which to extract data from a company register level and see all the types of financial intermediaries both institutions and retail with execution-only and advisory channels and the funds they are selling and in which markets they are registered for distribution.
Often there will be several institutions in the same country distributing a manager’s funds. Commercially, knowing who the different sales forces are, how much they are costing, and what the make-up is of investors buying the fund(s) will be hugely beneficial to the investment manager. It will enable them to compare fund sales and investor appetite in different markets, as well as provide insights on broad investor patterns, risk appetites etc.
For CFOs and Heads of Distribution there are clear advantages to having more granular, detailed information on fund sales in different markets, not only as a way to determine the demand for existing products, but as a proxy for future product innovation and expansion into new markets.
If a CFO can look at this, not just in terms of how much the asset management group is selling but also how much they might be paying away, he can begin to get an idea of how much gross contribution is being made on individual funds. By comparing such information at a country level, or across different distribution channels (retail, institutional), provides a much richer picture of as to the level of sales and marketing activities using third party distribution partners.
It will reveal what margin each fund is making in each of the markets it is registered for marketing and promotional activities to retail clients.
If you are selling at a higher margin in some countries versus others, why is this? Why would you incentivize distribution partners to sell products at a low margin? Such information, collated and stored on a single platform environment, will give asset managers a whole new view as by which to oversee their distribution strategy.
Moreover, aside from the commercial aspects of active distribution oversight there are compliance benefits. The legal and compliance teams will want to ensure that products are not being sold to the wrong investors, in the wrong countries; thereby generating a negative target market event under MiFID II and PRIIPs.
I worked at an investment management house for a number of years and we would build and look at things in this way. I’m surprised, looking at the funds industry more broadly, why asset managers have progressed further in the development of such management information.
From a sales and marketing perspective, having more granular data on distribution will likely lead to asset managers uncovering fresh new insights. In short, it will enable them to do more directed marketing, generating potentially higher sales.
Tied to distribution is the fund registration process. There are many synergies that could be realized using a platform. Today, for example, fund registration typically takes many months using external legal counsel and other third party intermediaries.
Using a single operating platform, this process should take no longer than one to two months, by comparison, allowing fund managers to respond quickly to changes in investor preferences. Today asset managers should be able to instruct the registration of their fund into the desired country using systems that are rules-based to drive automated instruction for the set-up with Regulators in Europe and further afield.
If the asset manager has a fund they want to get up and running for distribution, they will aim to be doing that within a couple of weeks. Having a system do all the heavy lifting and sending the fund documentation straight to the local regulator will not only significantly reduce costs, it will give asset managers a more precious commodity: speed to market.
There are also significant costs to be removed in addition by instructing , directly to the Regulators. Fleet footedness is an attractive benefit to any ambitious fund manager, when marketing their fund(s). If they can steal a march on their peers, so much the better.
Suddenly, by combining fund registration with distribution oversight, one has a clear picture of where each fund is registered, the date it was registered, when the sales process started and that the sales are appropriate, based on what has been registered and where.
The amount of documentation and reporting has intensified in 2017.
As such, it’s time for asset managers to change their mindset regarding distribution oversight and how funds are registered within their network.
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By Gary Janaway