Regulations drive distribution costs. How does the market react?
Until recently, the fund distributors’ world was uncontested and had remained unchanged for 20 years. Innovation was neither asked for, nor necessary. Since the 1990ies, most funds are distributed B2B-2B-2B – from the fund provider to the local fund platform, from there to the affiliated bank or insurance company, and then to the final investor – either directly or via a financial consultant. New regulations such as RDR or MiFID II and the resulting requirements, for instance KYD, are making the process ever more complex and constantly driving costs. In the good old world, the fund provider has fewer costs to start with on the road to the final investor – distributors only earn money in case of success.
The disappearance of retrocessions is now bringing about radical changes. Fund platforms are compelled to introduce fixed fees to compensate their loss of revenue through decreasing retros. For many fund managers, traditional B2B distribution has become very expensive, even prohibitive. They withdraw from various fund platforms, whose thinning offer loses its attractiveness. Concentration in the platform business, automation and in some parts even the elimination of intermediaries will be the fund industry’s major concern in the next few months. The only certainty is that distribution costs will (have to) decrease.
The relevant technologies have been available for quite some time already. It will be interesting to see who will win the race for the B2B market: stock exchanges, TAs, order routers or the large clearers Fundsettle respectively Vestima?