Remaining relevant by confronting disruption in fund distribution

One of the biggest challenges is to find a strategy for reaching the millennial generation.

Millennials are ‘digital natives’ who expect instant information digestible in Twitter-length feeds. This is a generation that clearly needs to save for the future. Defined benefit pensions are becoming a thing of the past and that first house purchase is occurring later and later in life.

With this challenge comes a potential threat from outsiders. Chris Chancellor, Partner, Mackay Williams, stresses there are many potential competitors out there. “It is vital that asset managers demonstrate the value they are bringing, build their brand and earn the trust of a new generation. The risk is that the technology companies will be trusted more. You can imagine peer-to-peer lenders setting up their own asset managers or Amazon entering the distribution space.”

Then there is the challenge posed by technology. Digital communication with investors opens up a world of new marketing possibilities. However, says Mr Chancellor, “millennials expect information instantly – they don’t want to wait two weeks after the month-end for the fact sheet to appear.”

At the same time, the increasing demand for data – from regulators, distributors and investors alike – is imposing a big investment burden on firms.

The most vocal response of fund managers, says Mr Chancellor, is that you’ve got to be big to survive in the new world. “Yes, there is an argument for size, he says. But size is not a tactic; it cannot be your differentiator. Brand is the key.”

Nick Lyster, Head of Wealth Advisory Services at Principal Global Investors agrees: “You’ve got to be sure both you and your clients understand what you’re offering them. Going forward, there has to be a greater focus on what differentiates your funds. Now you have to demonstrate expertise, through generating high alpha or risk-adjusted returns. I suspect there will be a lot more fund closures.”

At St James’s Place, Chief Investment Officer Chris Ralph echoes that sentiment: “Brand is key. We can explain our process of finding really good fund managers and delivering superior returns. In a world where there is an information overload, we provide simplicity.

“However, size is still important. The regulators recognise that it’s less complex dealing with a big distributor such as St James’s Place than 3,500 individual advisers across the UK.”

Mr Ralph agrees there is a demand for more and speedier detail but he has two important caveats regarding digital solutions. “We don’t believe they provide all the answers. For these really important decisions, clients still need to engage in face-to-face conversations with advisers, not tap a few keys on a keyboard.”

The other danger, he says, is that a flood of instant information can provoke knee-jerk reactions. “We want clients to recognise the long-term efficacy of the portfolio they are invested in and not over react when there is market dislocation – such as at the end of 2017.”

But, he says, transparency – clearly showing clients what they are investing in and what they are paying for – will be vitally important going forward: “We think there is some way to go before that is true across the whole of the industry. In Asia, for instance, there is a lot of information that is not very helpful.”

Mr Chancellor agrees. “This is an area where a lot of fund groups continue to struggle. Long-term, they will have to let the fund selectors see the whole portfolio. The performance will not always be there. You have to be able to show exactly how you’re creating value.”