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How new-style structures are changing the adviser’s world

 

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Ian Knox

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By Ian Knox*

The world of distribution of investment products and strategies is shifting up a gear. Recent innovation in investment structures is driving the change. It’s really exciting and may re-shape the world of intermediaries, such as financial advisers, in times ahead.

We have now witnessed the arrival of the ETF tsunami – arguably this is a wolf in sheep’s clothing, although ETF providers claim they are not dining out on managed funds. But the truth is it is dining out, and very well, on non-alpha-generating higher-fee-charging managed funds. So it has taken its place in portfolio construction, albeit by stealth.

Then we witnessed the mFund concept on the ASX, which was the early adopter of the equities market for exposure to managed funds but still struggles to get the big names with quality distribution. They ‘don’t really need it’ seems to be their mantra. Now, we are seeing the latest phase in the ASX arena with the exchange-traded product (ETP), which includes exchange-traded managed funds (ETMFs). I prefer to use the latter term because it is more descriptive.

The ETMF world is really interesting because it has all the hallmarks of what could threaten the need for advisers and researchers. And if one considered ETFs to be like a wolf ‘looking for the kill’, this latest development is a real step up. It is effectively an ETF that is actively managed – so the criticism of passive investment is eliminated but the ancillary benefits of liquidity, accessibility and execution speed remain. Pretty neat.

And for fund managers fed up with paying a lot for research-house ratings, it’s instantaneous gratification if they can raise market interest in their brand – a bit like an LIC, but perhaps without some of the LIC downsides such as frequently trading at discount to NTA and lack of broker awareness and support.

What this all means is a variety of new ways of investing and importantly for fund managers, an exciting new way of raising capital with lower cost for distribution. It also means targeting the direct market. The direct market is largely the SMSF market and the growing band of Gen X investors that are mainly willing to engage on terms of liquidity and transparency – these are two killer points in unit trusts, so it begs the question about the future development of unit trusts as an investment solution.

It’s a long way from sounding the death knell but it does imply that each new offering is designed on distribution grounds as much as investor needs. This implies that if the research houses don’t demonstrate value – perceived or otherwise – and dealers keep managers out of APLs for commercial reasons beyond investment capability – then it’s game on for the managers and who could blame them?

Naturally, the newcomer boutiques which have a manager with a proven history will love this new world. We’ve seen it happen in the past week with the Antipodes brand, but more importantly, we’ve seen heavyweights like Magellan pioneer the move and more recently, the AMP team up with an ETF provider – BetaShares – to head the same way.

One could argue the bigger firms are looking for distribution diversification and are determined not to be reliant on the planning community when their days of darkness arrive with faltering performance. The ebb and flow of Platinum is a worthwhile case to study on this issue and no doubt the others are watching with keen interest. I think we will see proven brand names enter the field as a matter of course over the next 12 months.

This innovative development isn’t just about planners, researchers, sponsorship costs and APLs – it’s also about the SMSF market, channel diversification and going B2C. It’s about creating a response to the SMSF sector’s drive and thirst for asset ownership and for GEN X’s investing attitude of doing it with or without help.

Out of interest, a report out this week highlighted that the SMA market on new platforms like HUB24 and Netwealth is making significant inroads into the SMSF market with SMAs, albeit via financial planners. This growth appears to strengthen the case for managed accounts compared to the old wrap platforms, which are likely to struggle with net flows. No doubt fund management firms will be watching this closely.

Typically, product managers are the strategists in fund management firms so it may be time for everyone to take a step back and start thinking about more than just products in the future. It’s increasingly about distribution patterns, consumer trends and the role and destiny of traditional versus contemporary advice firms. Have you ever noticed how marketing drives sales in consumer aware businesses but somehow sales drive marketing in financial services?

It’s an exciting time to be in the financial services market as it finally awakens to the fact that fintech business models are creating new generations of growth, new ways of doing business and providing enormous challenges to traditional models that have worked well for hundreds of years.

Picking the winners and the way to do business in the future has never been easier for some, or harder for others. Thinking outside the box may be the way to go and that is fantastic news for us all.

*Ian Knox is managing director of Paragem, a HUB24 company. The views expressed are his own. This column welcomes contributions. Contact: iknox@paragem.com.au

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