Last time we discussed this subject I focused on which would be the models / players that might win out in the end, with the conclusion that it is most likely to be the large traditional providers who are coming into the market with deep pockets and a streamlined approach via their technology.
Is there anything or anyone that could challenge them?
In terms of fiscal capability then probably not, unless a provider from outside the UK enters the fray. What’s more interesting is the positioning of the tax wrapper and the point of access into the fund managers and the part they could play.
All the facts and figures year on year continue to show that even though intermediaries deliver a significant revenue stream to the traditional providers, the true value of the capital that sits within our industry remains with the providers with only an estimated 1% of the capital value sitting within independent distribution itself.
The providers at first didn’t know what to do about wrap and now it’s likely that when they’ve analysed the ways that it could develop they have realised that there are scenarios where they could become disenfranchised in a way that will have given them sleepless nights.
In the world of the mutual fund investment all that should matter is that the clients’ money is able to access the appropriate funds at a fair and reasonable cost. In addition these investments will probably need reviewing/switching at a reasonable cost. As the traditional tax wrappers have become more homogenised, with perhaps trust differentiation being the most significant differentiator, then what matters is not who provides the tax wrapper, but how does an intermediary access the funds they want to invest on behalf of their clients?
As far as the customer is concerned as long as the funds are there do they really care if it’s Provider A or Provider B who provides the tax wrapper? In years gone by possibly, but I would say over the next few years they probably won’t. The advent of new brands or re-brands into the market and their subsequent success has not really seen any adverse impact on sales. The customer will continue to care about the service and the continuity and quality of advice they receive, the wrapper just won’t matter as much. There are already several examples of this within the UK wrap market where a ‘thin’ tax wrapper has been placed in front of the point of access into mutual funds. In return what the customer gets are the benefits of almost dealing direct with the fund manager. Some of these benefits will take time to come through effectively as these new wraps do not have the scale to compete at the moment, so the charging structure looks similar for now. But this should only improve the influence of the intermediary, as it is they who can then collectively bargain for improved terms for their clients.
Product manufacture has therefore started to look very different from today. Possibly the real need is for a third party to continue to take the liability via the tax wrapper, whilst the key relationship, between the point of distribution and the fund manager, is increasingly close in terms of commercial negotiation.
This isn’t a great scenario for the traditional product provider who is looking to continue to extract real value out of the value chain for themselves. So what will they do? They will look to own ‘distribution’ to ensure that their value in the process is protected.
They will need to continue to look at other ways of securing distribution, and for many this reality will be to own distribution, either directly or indirectly. Some traditional providers already have this available via their direct sales capability and the ever increasing direct to market opportunity.
So the opportunity has presented itself to distribution, but will distribution realise it, or will the chance to own a real piece of the value chain pass them by? My guess is it will pass them by. I think there’ll be the surge in wrap and platform providers as we are seeing now for a while, but this will eventually start to cannibalise itself. All the while the survivors will continue to accrue funds under management and become more influential whilst distribution grapples with the Retail Distribution Review and everything it brings.
Martin McKenna - 10th June 2010