Nicsa members received an in-depth look at current distribution trends during a Webinar Wednesday event moderated by Lesley Keefe, Managing Director at EY. The session, held early November, featured panelists from EY’s wealth and asset management business consulting practice.
During the second half of 2019 and early 2020, EY conducted research focused on two perspectives: asset managers as product manufacturers and wealth managers as their intermediaries. Nicsa’s Product & Distribution Committee participated in the initiative and were a key source of insights for EY’s research.
The study unveiled six key distribution trends, which the panel explored in detail during the session. Here are the key takeaways.
- The Rise of Digital
Christine Morath, Senior Manager at EY, said that digital tools will be essential in enabling human interactions, not replacing them.
“With the expected generational wealth transfer of $70 trillion over the next 25 years, building out relationship management models will be key, both for those incumbents and also for any new entrants in the wealth management space,” she said.
Morath said Europe is lagging behind the U.S. as far as digital interaction models go, with traditional, advisor-based distribution models continuing to dominate.
“In Asia-Pacific, we see a completely different story,” she said. “The digital appetite is much stronger, and data privacy concerns do not play as much of a role as they do in North America or Europe, so firms in the region are a little more flexible. They are also not faced with a significant legacy infrastructure and can build new platforms easily.”
From the asset management perspective, Desiree Schuewer, Senior Manager at EY, said digital interactions affect how asset managers distribute their product.
“They allow for lower cost distribution and impact the pricing of products, type of products distributed, investment strategies, and services,” she said, adding that the ongoing pandemic has put the adoption of digital tools in fast-forward.
- Demands from Fragmented Markets
Morath said asset managers’ global operating models must address local demands while meeting the needs of their primary markets. Worldwide, COVID-19 has put asset managers to the test in terms of technical infrastructure, digital interactions, and the availability of human support.
In the U.S., the largest, lowest-cost product providers are in the best position, while in Europe, asset managers face a fragmented market dominated by high-cost private bank channels.
The Asia-Pacific region differs between countries: Investors in Australia, Japan, and New Zealand tend to be cost-sensitive with a conventional understanding of wealth management. Singapore and Hong Kong lean toward a hybrid between traditional advisor-based models and a digital service approach, while China boasts strong digital channels and demand.
Schuewer said similar trends are occurring on the asset management side: “We’re seeing that global asset managers have to cater to several distribution models, local investor preferences, and regulatory requirements, which also include local product regulation and disclosures.”
- Untapped Product Opportunities
The EY study revealed that exchange-traded funds (ETFs) and environmental, social, and governance (ESG) products continue to gain market share across the globe.
“The volume of product assets with ESG considerations has increased significantly, from around $1 trillion in the second quarter of 2019 to almost $7.5 trillion one year later,” Morath said. “In addition, a large majority of asset owners are selecting asset managers with ESG capabilities.”
Europe leads the way in this area, with robust product offerings and an advanced regulatory landscape. Uncertainty in terms of the regulatory environment presents a challenge for ESG investment in the U.S., while the APAC region lags behind both the U.S. and Europe.
Schuewer said ETFs continue to gain market share globally. Meanwhile, asset managers are working to make alternatives more accessible to retail investors.
- A Shift in Service Models
EY’s research shows that broker-dealers and RIAs in the U.S. are making the move to a fee-based advice model, driving increased development in technology designed for financial advisors and the adoption of proprietary asset allocation models.
Schuewer said that for asset managers, the focus is more on providing holistic solutions and entering strategic partnerships than selling products.
“Asset and wealth managers are engaging increasingly with a limited set of strategic partners,” she said. “We’re seeing large asset managers that can provide a broad array of products being well-positioned, because they can provide the products required to meet the advisors’ needs, as opposed to a certain segment’s focus.”
- Changes in Talent Requirements
On the wealth management side, Morath said firms are investing significant effort in ensuring the next generation of advisors reflects consumer demographics. These efforts include issuing incentives for mentorship, hiring diversity, and technological adoption.
Schuewer said there’s a different skill set required for asset managers today. Face-to-face models are losing popularity; therefore, online collaboration and digital know-how are increasingly valuable in distribution roles. In Europe, however, this shift varies based on country. In France, distribution remains primarily face-to-face, while German investors tend to be open to hybrid models of digital-human interaction.
- Industry Consolidation
Finally, Morath said there is significant activity in the RIA space on the wealth management side. “By the end of 2019, firms with $1 billion in assets under management firms represented 60% of all assets in the RIA channel,” she said. “In 2020, we’ve seen a lot more consolidation with more than 20 firms with $1 billion in assets under management being acquired.”
According to Schuewer, EY’s research shows that merger and acquisition activity continues across the globe.
“The one exception is China, which is an emerging market for distribution, and we’re seeing large asset managers trying to find the right target to provide manufacturing and distribution onshore.”
Nicsa members can listen to an archived version of the webinar here.
Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the Nicsa panel, they do not necessarily reflect the views of Nicsa or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.