In the last decade the banking industry has made tremendous
efforts to digitalise its services. The investment industry has
been slow to catch up, but has begun to find its footing with
robo-advisors making a loud entrance.
But what about funds? Have you ever invested with your
Funds are mostly sold to retail investors via distributors (e.g.
banks or financial advisors) that receive commissions on the volume
of fund sales—but this model incentivises distributors to
push funds with high commissions to retail investors instead of
searching for products that suit their needs best.
Thus, the European Commission has decided to put an end to this
system with the MIFID II directive, which bans the payment of
commissions to independent advisors. This represents a real
paradigm shift for fund distribution. But it also brings some
unintended consequences: independent asset managers (i.e. those
without a proprietary distribution network) will face a more
challenging environment in which to distribute their funds; and
banking institutions with an in-house asset manager will close
their product range to become dependent, if they haven't
already—this allows them to continue receiving
Selling funds via mobile apps
In this context, some independent fund houses dream of directly
reaching final investors by digital means such as mobile apps.
Unfortunately, this is not as simple as it sounds. First, for
average customers, asset managers are virtually unknown compared to
the familiar bank names. Building a strong brand name is thus
essential to get in touch with final investors. A similar
transformation has been observed in the pharmaceutical sector, for
instance, which also used to be a B2B-industry with low brand
recognition by patients. With massive marketing campaigns, these
companies have succeeded in drastically increasing brand
Secondly, operation costs must be significantly cut. Large
amounts of money per transaction have made the transaction cost
bearable for investors. E-distribution would bring a higher volume
of transactions with much lower amounts. The current cost structure
risks making e-distribution unprofitable. We see AML/KYC and order
processing as two areas where costs might be cut.
Digitalisation of the back office
Heavy AML/KYC procedures need to be automated and made
paperless. Indeed, solutions are already available: mobile
solutions, for example, prompt an investor to take a selfie and
submit it as his or her ID; the name is then run through a PEP
database; if no anomalies are found, the account is immediately
created. Errors, on the other hand, can be further investigated
manually. The procedure can also operate on a stratified basis,
applying more rigorous verification for users investing large
amounts, and quicker verification for those investing small
On top of digital solutions, costs could be shared across the
industry with a central repository of AML/KYC documents. The
investor would just need to grant access to the financial
institution in order to retrieve his or her personal data from this
Order processing also needs to be redesigned to make small order
processing profitable. Currently, fund order processing entails
many manual tasks and reconciliations. With distributed ledger
technology, i.e. blockchain, order processes could be automated
with smart contracts that check and validate orders. Investor
registers could be updated and stored on a distributed ledger that
is shared between the fund accountant, the custodian, and the asset
manager. Order processing could be automated and reconciliation
decreased, which would lead to lower operation costs.
A new fund market infrastructure evolves
Significant development costs might hinder many small and medium
asset managers, but concurrent with that would be an opportunity
for providers that could develop an infrastructure allowing costs
to be shared amongst asset managers.
In the last decade, we have seen many industries digitalise
their activities or products, banking, retail, music, and movies
being but a few examples. We believe that these transformations are
inevitable for asset managers, who must now give attention to their
own reinvention. The challenges are not unsolvable and the cost of
not acting is too big—and new actors may be entering the
market as well.
As a last word, we believe that e-distribution will benefit
final investors by providing them with a new and more direct
channel with which to invest. From a macroeconomic point of view,
more money invested will lead to a more prosperous economy.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Here in Luxembourg, LPEA are holding an event which will offer new initiatives by bringing General Partners (GPs) and Limited Partners (LPs) together to examine and speak on the industry from the “360” perspective, leaving no stone unturned. We are a sponsor of the event, as well as having a speaker present. David Capocci, Partner and Head of Alternative Investments will be offering his own insight on the industry nowadays.
The conference will centre on the new tax normal, full transparency, and specifically the role of private bankers in this new age. Originally perceived as a threat to existing business models, full tax transparency may actually hold new opportunities for private bankers.
ICT Spring is a global technology conference that welcomes various international professionals from the technology space. It is a two-day yearly event which is held in Luxembourg City, “at the heart of Europe, and offers the participants a unique opportunity to deepen their digital knowledge, capture the value of the fast-growing FinTech industry, and explore the impact of space technologies on terrestrial businesses, through exhibitions and demonstrations of the latest tech trends and innovations.”
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I am a strong believer in technology. Very deeply, I am convinced that innovations and new technologies will bring about an era of abundance.
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