Regs and revolution
28 June 2017
Regulation and technology were still the hottest topics in town at Fund Forum International in Berlin. Stephanie Palmer reports
Image: Shutterstock
As the funds industry descended on Berlin for three days of insight, discussion and networking drinks, the ongoing regulatory burden remained at the front of attendees’ minds, while the threat—or opportunity—of technology disruption was also a hot talking point.
The regulatory environment, and specifically the second Markets in Financial Instruments Directive (MiFID II), is breeding change, and complication, for both investors and fund managers, according to speakers in an early session.
Euan Munro, CEO of Aviva Investors, suggested that, globally, MiFID II has “complicated the picture”.
While Munro noted the importance of the directive’s main objectives of transparency and investor protection, he also conceded that actually implementing the legislation is “incredibly complicated”.
He warned, specifically, against the potential unintended consequences of the directive and the possibility that some investors may end up receiving worse-quality counsel. He referenced the “race-to-the-bottom” in fee structures following the implementation of the Retail Distribution Review in the UK, in which the only aspect considered is return outcome, not risk outcome. Taking responsibility for a fund is critical, Munro added.
And within the current regulatory landscape, investor solutions are changing. Another speaker, Jamie Hammond, UK CEO at AllianceBernstein, said solutions have evolved, and will continue to do so. Investors have different appetites for risk and return, Hammond said, and firms should assess them individually and come up with a solution that meets their needs.
Finally, Julie Patterson, director of asset management and regulatory change at KPMG UK and moderator of the session, asked panellists whether new transparency and disclosure requirements are actually helping end investors in real terms.
On this topic, Neil Carnegie, founder of Carnegie Fund Services, suggested that, of all the investor disclosure documents and prospectuses that are produced, only about 15 percent is actually ever read.
Some of these prospectuses can run into more than 200 pages, Carnegie said. He called a lot of the information “stale and repetitive” and questioned whether it is of any use in helping the adviser or investor to understand what the product is.
In a later session, Peter Nonner, managing director at FIL Fondsbank, suggested that in the new distribution landscape under MiFID II, independent financial advisers (IFAs) should consider changing their business models and move “away from pure commission-based models to service fee models” to “show added value to their clients”.
From a legal standpoint, Dr Edgar Wallach of Hengeler Mueller added to this, noting that under the new directive, inducements “can only be justified if it can be demonstrated that it is in consideration for enhanced quality of services”.
Wallach went on to question what this advanced quality of service actually means. If IFAs would like to receive ongoing commission in the future, they could offer third-party products or portfolio monitoring services. He reminded delegates that IFAs are not directly subject to MiFID II rules, but added that they are indirectly affected because of the data collection requirements for fund platforms, which have to verify that products are being sold in line with the distribution strategy.
IFAs are “already an integral process of the target market supervision”, he said.
Another panellist, Dr Christian Dicke, CEO of Fondsdepot Bank, took a generally positive view of MiFID II, saying: “In all the threats there are also opportunities.”
Firms are investing in order to stay compliant, and to meet cost transparency and product governance requirements, they need robust IT systems. Within the whole industry, but particularly among small- and medium-sized banks that may not have invested so much in the past, “this is a small technology revolution”, Dicke said.
This technology revolution is also present in the advisory world, where it is equally intertwined with regulatory issues.
In another session, panelists suggested that robo advisory services may boost efficiency in portfolio management, but warned that they could be at risk of a crash if they don’t adhere more closely to regulation.
Thomas Bloch, co-founder and CFO of digital asset manager Vaamo, said the term ‘robo adviser’ can be “misleading in many instances”, adding that many focus on investment, exchange-traded funds and index funds. The “core robo element” is more about scaling investment decisions electronically and removing some of the complexity in investment, he said.
Lars Reiner, founder and CEO of robo adviser Ginmon, added that portfolio optimisation can be improved through automated solutions. He described robo advisers as, primarily, technology companies, and suggested that as such they focus on “making the value chain as efficient as possible”.
However, one speaker was more sceptical of the robo revolution. Paul Resnik, co-founder and director of FinaMetrica, suggested that some robo advisers use very short suitability questionnaires, and do not meet regulatory obligations of properly ensuring assets are right for clients. The regulation is there “because we had dissatisfied customers”, he said. “We have the regulation we deserve.”
In the robo advisory market, there is likely to be a crash, and investors’ expectations will not be met, leading to what Resnik called “a correction”. When the markets correct, investors will try to get out of “whatever’s liquid”, and whatever they can get out of quickly, which is likely to be their robo advisory investments.
Resnik had one note of positivity, however, saying this is the “perfect chance for the industry to self-regulate”.
Another speaker, Steffan Binder, co-founder of MyPrivateBanking Research, put himself “pretty much in the optimist camp”, but said that robo advisory models will still need human involvement.
“People need some kind of human interaction with their advisers,” Binder said, suggesting that a hybrid solution “will be the winning model”.
Later, Porter Erisman, former vice president at Chinese ecommerce platform giant Alibaba Group, suggested that Chinese innovation in financial services could pose opportunities for the wider fund management industry,
When considering the parallel rise of ecommerce and fintech in China, “the two are inseparable”, said Erisman, who is also the author of Alibaba’s World: How a Remarkable Chinese Company is Changing the Face of Global Business.
With the success of Alibaba in China came AliPay, an escrow system that held buyers’ money until the transaction was complete, and then sent it on to the seller. From AliPay grew Ant Financial and its money market fund, which raised $90 billion in assets in just three years.
Through development of mobile payments capabilities, fintech is now “part of the daily fabric of people’s lives” in China. Going forward, Erisman suggested that “data is going to drive the revolution”. In China, there is a lot of data available on the cloud, without the same sensitivity around data protection seen in other parts of the world.
Regulators have, for the most part, embraced fintech in this area, “allowing it to grow”.
Similar developments are coming about in India and Southeast Asia, and in these markets digital is “going to be the core of how things are done”. According to Erisman, this creates an opportunity for the fund management industry by offering “access to all these new investors”.
“I don’t see Chinese ecommerce companies coming here and taking, head on, the financial institutions,” he said. “More than anything, it’s a way for you all to tap into the hungry Chinese investors.”
However, speaking in a different session, Neil Ward, former general manager of global business operations at Skype, warned that traditional funds players should in fact look out for “bigger, smarter players”, such as Amazon, with a lot of money locked away.
Ward warned attendees that if they don’t build up their technology capabilities now, these tech players may well “take our breakfast”.
In the session, focused on digital disruption, Ward told delegates: “If you disrupt from within and stay ahead of the curve you stand a chance to take the benefit of technology, of creating a culture of can-do, using data to drive decision making.”
However he added the caveat: “In terms of digital acceleration programmes, you’ve got to have real buy-in across the board.”
Funds industry participants should focus on issues such as data processing, data manipulation and creating client interfaces that are simple, secure, and have robust cyber security—building systems that “are really profitably run with a great ecosystem price point for fund managers and fund administrators”.
This will give firms the lead time that will allow them “to compete and win”.
Finally, Ward urged attendees to make better use of the data available to them, saying there are “opportunities being missed”.
He said: “There’s a massive amount of data swimming around you guys and I don’t think you get 1 percent of the value out of it.” He added: “Figure out the data piece, build on top of that.”
The regulatory environment, and specifically the second Markets in Financial Instruments Directive (MiFID II), is breeding change, and complication, for both investors and fund managers, according to speakers in an early session.
Euan Munro, CEO of Aviva Investors, suggested that, globally, MiFID II has “complicated the picture”.
While Munro noted the importance of the directive’s main objectives of transparency and investor protection, he also conceded that actually implementing the legislation is “incredibly complicated”.
He warned, specifically, against the potential unintended consequences of the directive and the possibility that some investors may end up receiving worse-quality counsel. He referenced the “race-to-the-bottom” in fee structures following the implementation of the Retail Distribution Review in the UK, in which the only aspect considered is return outcome, not risk outcome. Taking responsibility for a fund is critical, Munro added.
And within the current regulatory landscape, investor solutions are changing. Another speaker, Jamie Hammond, UK CEO at AllianceBernstein, said solutions have evolved, and will continue to do so. Investors have different appetites for risk and return, Hammond said, and firms should assess them individually and come up with a solution that meets their needs.
Finally, Julie Patterson, director of asset management and regulatory change at KPMG UK and moderator of the session, asked panellists whether new transparency and disclosure requirements are actually helping end investors in real terms.
On this topic, Neil Carnegie, founder of Carnegie Fund Services, suggested that, of all the investor disclosure documents and prospectuses that are produced, only about 15 percent is actually ever read.
Some of these prospectuses can run into more than 200 pages, Carnegie said. He called a lot of the information “stale and repetitive” and questioned whether it is of any use in helping the adviser or investor to understand what the product is.
In a later session, Peter Nonner, managing director at FIL Fondsbank, suggested that in the new distribution landscape under MiFID II, independent financial advisers (IFAs) should consider changing their business models and move “away from pure commission-based models to service fee models” to “show added value to their clients”.
From a legal standpoint, Dr Edgar Wallach of Hengeler Mueller added to this, noting that under the new directive, inducements “can only be justified if it can be demonstrated that it is in consideration for enhanced quality of services”.
Wallach went on to question what this advanced quality of service actually means. If IFAs would like to receive ongoing commission in the future, they could offer third-party products or portfolio monitoring services. He reminded delegates that IFAs are not directly subject to MiFID II rules, but added that they are indirectly affected because of the data collection requirements for fund platforms, which have to verify that products are being sold in line with the distribution strategy.
IFAs are “already an integral process of the target market supervision”, he said.
Another panellist, Dr Christian Dicke, CEO of Fondsdepot Bank, took a generally positive view of MiFID II, saying: “In all the threats there are also opportunities.”
Firms are investing in order to stay compliant, and to meet cost transparency and product governance requirements, they need robust IT systems. Within the whole industry, but particularly among small- and medium-sized banks that may not have invested so much in the past, “this is a small technology revolution”, Dicke said.
This technology revolution is also present in the advisory world, where it is equally intertwined with regulatory issues.
In another session, panelists suggested that robo advisory services may boost efficiency in portfolio management, but warned that they could be at risk of a crash if they don’t adhere more closely to regulation.
Thomas Bloch, co-founder and CFO of digital asset manager Vaamo, said the term ‘robo adviser’ can be “misleading in many instances”, adding that many focus on investment, exchange-traded funds and index funds. The “core robo element” is more about scaling investment decisions electronically and removing some of the complexity in investment, he said.
Lars Reiner, founder and CEO of robo adviser Ginmon, added that portfolio optimisation can be improved through automated solutions. He described robo advisers as, primarily, technology companies, and suggested that as such they focus on “making the value chain as efficient as possible”.
However, one speaker was more sceptical of the robo revolution. Paul Resnik, co-founder and director of FinaMetrica, suggested that some robo advisers use very short suitability questionnaires, and do not meet regulatory obligations of properly ensuring assets are right for clients. The regulation is there “because we had dissatisfied customers”, he said. “We have the regulation we deserve.”
In the robo advisory market, there is likely to be a crash, and investors’ expectations will not be met, leading to what Resnik called “a correction”. When the markets correct, investors will try to get out of “whatever’s liquid”, and whatever they can get out of quickly, which is likely to be their robo advisory investments.
Resnik had one note of positivity, however, saying this is the “perfect chance for the industry to self-regulate”.
Another speaker, Steffan Binder, co-founder of MyPrivateBanking Research, put himself “pretty much in the optimist camp”, but said that robo advisory models will still need human involvement.
“People need some kind of human interaction with their advisers,” Binder said, suggesting that a hybrid solution “will be the winning model”.
Later, Porter Erisman, former vice president at Chinese ecommerce platform giant Alibaba Group, suggested that Chinese innovation in financial services could pose opportunities for the wider fund management industry,
When considering the parallel rise of ecommerce and fintech in China, “the two are inseparable”, said Erisman, who is also the author of Alibaba’s World: How a Remarkable Chinese Company is Changing the Face of Global Business.
With the success of Alibaba in China came AliPay, an escrow system that held buyers’ money until the transaction was complete, and then sent it on to the seller. From AliPay grew Ant Financial and its money market fund, which raised $90 billion in assets in just three years.
Through development of mobile payments capabilities, fintech is now “part of the daily fabric of people’s lives” in China. Going forward, Erisman suggested that “data is going to drive the revolution”. In China, there is a lot of data available on the cloud, without the same sensitivity around data protection seen in other parts of the world.
Regulators have, for the most part, embraced fintech in this area, “allowing it to grow”.
Similar developments are coming about in India and Southeast Asia, and in these markets digital is “going to be the core of how things are done”. According to Erisman, this creates an opportunity for the fund management industry by offering “access to all these new investors”.
“I don’t see Chinese ecommerce companies coming here and taking, head on, the financial institutions,” he said. “More than anything, it’s a way for you all to tap into the hungry Chinese investors.”
However, speaking in a different session, Neil Ward, former general manager of global business operations at Skype, warned that traditional funds players should in fact look out for “bigger, smarter players”, such as Amazon, with a lot of money locked away.
Ward warned attendees that if they don’t build up their technology capabilities now, these tech players may well “take our breakfast”.
In the session, focused on digital disruption, Ward told delegates: “If you disrupt from within and stay ahead of the curve you stand a chance to take the benefit of technology, of creating a culture of can-do, using data to drive decision making.”
However he added the caveat: “In terms of digital acceleration programmes, you’ve got to have real buy-in across the board.”
Funds industry participants should focus on issues such as data processing, data manipulation and creating client interfaces that are simple, secure, and have robust cyber security—building systems that “are really profitably run with a great ecosystem price point for fund managers and fund administrators”.
This will give firms the lead time that will allow them “to compete and win”.
Finally, Ward urged attendees to make better use of the data available to them, saying there are “opportunities being missed”.
He said: “There’s a massive amount of data swimming around you guys and I don’t think you get 1 percent of the value out of it.” He added: “Figure out the data piece, build on top of that.”
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