2020 has been a disaster for many businesses. The financial services sector has been very lucky in comparison, insulated from the worst of the crisis.
Looking ahead to 2021, we examine here the major trends that are due to shape retail investment channels across the UK and Europe.
In Europe…
2021 will mark the end of the process of consolidation in the institutional cross-border platform industry. A few giant firms now dominate the scene – most notably Allfunds, Clearstream and MFEX. All eyes will be on Allfunds in 2021, with its IPO on the cards. We’ll also see the shape of Clearstream’s alternative to Allfunds, and MFEX’s capacity to keep up with the two giants.
The cost of fund distribution across Europe will also become a more active topic of conversation in 2021. Asset managers will look more critically at what they pay for increasingly unbundled platform services – from transaction and custody through to distribution agreements and rebate management.
New EU regulations on sustainable investments (SFDR) will kick off in March. By the end of 2021 we should know the winners and the losers of the shift towards ESG, and start to see its long-term consequences.
Distribution models across countries will continue to diverge. We expect the German 34f adviser market to complete the modernisation and consolidation to increase its competitiveness. Italy will increase its reliance on networks of tied advisers. We also expect sub-advised fund assets to grow right across the continent, as distributors chase the extra margins in asset management and build their own investment ‘solutions’.
In UK D2C…
D2C players will recruit more customers in 2021 (though perhaps not as fast as this year). Consumers are increasingly worried about their financial resilience and with minuscule interest rates on cash are more and more ready to invest their money. COVID-19 has not hit everyone evenly. Some have lost jobs and incomes; others have been able to save more. Some of those additional savings should filter through to investments.
Personal investing across all channels will be digitised even more rapidly than this year. Services without a decent mobile proposition can’t be serious players and the bar gets higher as more people want to do everything on a small handset.
We’ll also see further acquisitions and consolidation by the major D2C players, as providers try to increase their market share of assets. Interactive Investor has grown through acquisition to become the second largest direct platform, but its private equity owners will soon start looking for the exit sign.
In UK financial advice…
Firms have been struggling with efficiency in recent years. There is a shortage of advisers, so adviser remuneration is up. But firm revenues have plateaued as they have struggled to bring on sufficient new clients. The scene is set for continued consolidation and new investment in technology to increase firm productivity.
Advisers will accelerate the standardisation of their investment propositions. MPS will reduce in cost as more wealth managers remove VAT from their management charges. Advisers who want to retain more control and save their clients money will find multi-asset funds and model portfolios more and more appealing than bespoke fund-picking.
The value of financial advice will go under the spotlight in 2021. The FCA claims that there’s a lack of competition in the sector and investors might be paying for services they don’t need, flagging ongoing advice, non-workplace pensions and drawdown in recent months. We’ve already seen the FCA look at value for money in the platform and asset management markets – financial advice will be next.
In UK adviser platforms…
Proper platform consolidation will speed up, meaning not just swapping ownership. There is oversupply in the platform market as most advisers acknowledge. Subscale players will disappear into larger platforms and asset or wealth managers.
Platforms will widen their distribution of in-house investment funds and MPS. Those who don’t currently offer these products will move into this arena. Platforms hold valuable insights and data and truly understand adviser and even client demand for services – far more than asset managers.
In UK wealth management…
Wealth management firms will expand advised distribution, both by recruiting their own financial planners and through third-party adviser firms. The wealth management market will get even more crowded, as more firms set up vertically integrated businesses.
In UK asset management…
The drive towards ‘solution’ investments rather than reliance on single-strategy building blocks will continue to reshape the asset management market. Large asset managers will buy up even more distribution and technology businesses in their drive towards market domination through vertical integration. Smaller asset managers will consolidate even further in their search for economies of scale where they can’t achieve enough organic growth.
Financial advisers who evangelise for active management tell us that weakness of passive funds is their inability to outperform in falling markets. We have now seen the first significant post-RDR market crash – which will act as a catalyst to turn the tides towards passive. The battle is being fought on cost, but the war will be won on performance.
Our blog will be back in the New Year. We wish everyone a merry Christmas and a happy New Year. And in the parlance of 2020: “stay safe!”