Although banks have dominated the overseas sale of mutual funds and have served as a barrier to U.S. fund companies looking to enter foreign markets, the international bank channel is losing its dominance, according to a recent report from Boston research firm Cerulli Associates.
This could benefit U.S. firms as they try to penetrate international markets, said Ben Phillips, an analyst in Cerulli's London office. "It's now easier for U.S. firms to sell their funds in multiple countries," Phillips said.
Although banks are the "fastest-growing distribution channel" in Japan and control 60% of fund distribution in Europe, they are losing their dominance, according to Cerulli. Intermediaries and investors are increasingly demanding more products and investment advice, which is threatening the channel's grip on fund distribution, according to Cerulli. European investors in particular are becoming aware of the performance of their funds as services from Morningstar and Standard & Poor's proliferate across the continent.
In Asia, meanwhile, banks face new competition from nontraditional distribution channels. Singapore banks, for example, are bracing for a surge in fund sales by independent financial advisers after the Financial Advisers Act was approved in that country last October. The act streamlines different regulatory agencies that govern financial advisory services, which in turn will allow a stronger independent adviser sales channel to emerge in Singapore by 2003, Cerulli said.
In response to the looming threat, the report said that Singapore banks are increasing their sales forces and collaborating with potential competitors to sell banks' proprietary funds. Singapore-based DBS Bank, for example, has expanded its internal sales force by 120 workers and plans to recruit 140 financial advisers this year.
In addition, foreign banks, including Standard Chartered of Hong Kong, could strike deals with small insurance agents who act as independent financial advisers. The arrangements could result in aggregated products and back-office services.
Although banks are entrenched in the Japanese culture, Japan's banking sector is exploring new avenues of distribution and marketing. Four banks, accessible only via the Web, have emerged in Japan since October of 2000, Cerulli said. The dominant three controlled 780,000 accounts as of March, with Japan Net Bank, an affiliate of the giant Sumitomo Mitsui Banking Corp., holding the majority.
The report noted that Sony Bank, the smallest of the three dominant online players, with just 80,000 accounts, has employed novel marketing schemes, including animated animals on its Web page that act as assistants and provide advice to users. The Japanese press was ecstatic about the feature, Cerulli said.
In Europe, meanwhile, German banks are trying to reconcile investors' demand for more products with their own trepidation over selling third-party funds along with their own products. Banks there are "fiercely protective of their brand name" and are reluctant to share their distribution channels with other companies, the report said.
Still, given the Europe-wide movement toward open-architecture - that is, platforms that provide more choice in products - Cerulli said that German banks must find ways to educate investors about the increasing number of investment options they face. In addition, the education efforts should help investors feel comfortable with the in-house products they have already purchased compared to the newly available third-party funds, Cerulli said.
The report said that German banks will likely have to hire internal financial advisers to help educate investors. But in the near-term, banks are more likely to embed a range of products within a single vehicle. For example, some banks are selling funds-of-funds, known as dachfonds. Those vehicles, which have attracted about $24.5 billion in assets since they were introduced in 1998, allow less-experienced bank tellers to "sell a reasonably diversified investment product," Cerulli said.