Heightened regulations across the globe are impacting how U.S. fund managers with foreign operations market and distribute their platforms.
One of the more recent regulations to impact the fund industry is the Retail Distribution Review rules that started being enforced in the United Kingdom last year. The RDR, which ended the practice of allowing financial advisors to earn commissions from fund companies in exchange for selling or recommending their products, is being felt among not just European firms but also U.S. fund companies who have operations in England such as BlackRock, State Street and Vanguard, according to Deborah Fuhr, managing partner at London-based ETFGI.
"It does have an impact in terms of how you market and sell funds in the UK," says Fuhr. "It definitely impacts companies that have a global presence."
The RDR has resulted in 70% of European asset managers dedicating resources to fund selectors, according to new research report issued by Cerulli Associates. One-fifth of the 128 asset managers across Europe are focusing more on direct-to-consumer networks and upping their marketing focus toward investors, the Cerulli Associates' European Distribution Dynamics 2014 report highlights.
"The RDR has removed much of the bias in the market and established managers can aim higher and increase their sales targets" says Angelo Gousios, senior analyst at Cerulli and one of the main authors of the study, which interviewed fund managers and distributors in the United Kingdom, France, Germany, Italy, Spain, Sweden and Switzerland.
In the short time since RDR was first implemented, expense ratios at UK investment firms have dropped on average between 50 and 75 basis points, according to Morningstar analyst Ben Alpert. He says while the U.S. has also seen stricter regulations in recent years, fund companies have not felt similar drops in their expense ratios, which often factor in marketing costs known as 12b-1 fees.
Much of how asset managers are shifting distribution strategies as a result of RDR involves marketing. Respondents in the Cerulli study indicated plans for more road shows targeting IFAs (30%) as well as dedicating resources toward relationships with paraplanners (30%). Managers are also eying investing more in videos and interactive material (10%). Regulation in the U.S. and across the world is leading to an accelerated push toward more online distribution platforms, according to Reggie Karas, senior vice president and managing director of the alternative solutions group at Millennium Trust. "We are seeing more access and transparency," says Karas. "It is simplifying the approach for investors and financial advisors." Similar versions of RDR have been created in India and Australia with this regulatory structure also in the process of being set up in Switzerland, Germany, Italy and South Africa. New York-based PwC forecasts in its recently-released recent report entitled Asset Management 2020: A Brave New World that by the start of next decade, RDR or similar regulations on fee models and other disclosures " will apply to all major markets including Asia" This will lead to global fund providers needing to beef up their compliance staff in order to "cope with increasing regulator demands and the challenges of implementing regulation effectively", the PwC report explains.
U.S. Regulation Impacting Fees
The regulatory climate in the U.S. asset management industry remains a challenge nearly a decade after the Pension Protection Act of 2006, according to John Siciliano, managing director and strategy lead for U.S. asset management advisory at PwC. Siciliano says the Pension Protection Act along with new Department of Labor disclosure standards for defined contribution plans instituted in 2012 and other regulatory measures have resulted in fund companies being forced to drastically reduce distribution fees.
"[Fund managers] are having to be more careful with fees and how they distribute," says Siciliano. "It puts a lot of pressure on margin."
Siciliano says the increasing pressure to lower fees will result in momentum for more indexed offerings distributed by fund providers. The PwC report estimates that passive investment products will triple up to $22.7 trillion by 2020 driven largely by the push for more cost transparency.
Growing UK Third Party Distribution
Third-party distribution in the UK grew from 52.7% at end of 2012 to 53.9% one year later, according to the Cerulli study. Seventy five percent of new advisor business was conducted via third-party platforms in 2012 compared to 69% in 2012.
The highest planned third-party distribution channels European fund managers are eying in 2014 include proprietary/affiliated networks (24.4%), unintermediated (21.7%), business-to-business platforms (18.9%) and private banks/wealth managers (15.4%). Direct-to-consumer networks through online platforms is also growing among managers in Europe from 4.2% in 2013 to 4.8% in 2014.
Fuhr says global asset managers who do business in Europe face obstacles not just from RDR in the UK but also from differing tax rules and currencies in various countries. U.S. fund managers also could face increased obstacles if new regulations proposed by the Securities and Exchange Commission regarding 12b-1 fees that investors pay when they purchase shares in certain mutual funds go into effect.
"Regulation and compliance is becoming an increasing challenge for the asset management industry," says Fuhr. "The impact of regulation keeps shifting."