Why an evolving advice industry is challenging for investment managers too

Published 2 October 2020

It’s often said good strategy is like gold: it’s precious, but rare. But when the challenges appear ubiquitous and the market strewn with look-alike competition it’s strategy (your inimitable gameplan) that stands out.

CoreData’s recent investment management roundtables revealed a strong consensus among managers on the greatest retail distribution challenges they face. Our recent licensee and adviser research helps explain why these challenges have arisen.

Investment managers face four major challenges as their traditional distribution networks – financial planning licensees and the advisers they authorise – restructure and rearrange themselves in response to market forces and regulatory changes. As these networks fragment, or unbundle, it’s becoming more difficult for investment managers to reach large numbers of advisers through a relatively small number of licensee relationships.

There’s increasing pressure on investment managers to validate their investment rationale and competitive advantage. Managers need to be able to explain, clearly and simply, what is special, better, or different about the sources of alpha they offer (in the case of active managers) or the process of replication they apply (in the case of index managers).

Managers must become more skilled at providing a compelling, logical, investment case. Why should anyone invest in this product or investment management capability? They must demonstrate returns consistent with this rationale – proof of their capability. They should be assessed against a meaningful, relevant and justifiable benchmark; and they must offer all of this under a transparent, competitive fee structure.

It sounds simple, but beware. As one respondent to a recent CoreData survey of licensee research heads said: “85 per cent of managers fail at least one of these four. That’s our filter!”

But a compelling thesis alone is not enough. To reach advisers, investment managers must also choose the structures within which they offer their capabilities, and be able to explain its features, benefits and how it fits in a portfolio context. Why offer an unlisted managed fund rather than an exchange-traded fund (ETF), or an ETF rather than a listed investment company (LIC), or a LIC instead of a separately managed account or a listed managed fund?  Advisers are looking for flexibility, to meet the needs of their own clients. The manager – particularly its sales and service teams, must answer the question: “Why this product structure over others?”

It is not only the financial advice industry that is unbundling. Investment managers must navigate a research intermediation community that is also growing and diversifying. Outside the major research houses (Morningstar, Lonsec, Mercer and Zenith), CoreData has identified at least a couple of dozen other “model portfolio researchers” – or, as they have been described, “pop-up researchers”.

These businesses are rapidly becoming advisers’ outsourced chief investment officers. They don’t necessarily rate funds themselves, but they guide and advise the advisers on how to assemble portfolios and focus on the right risk/reward solutions for the right clients. They are increasingly influential and investment managers need to get to know them well.

Success for investment managers will hinge on how effectively they respond to the great advice unbundling. Institutions have largely exited financial planning. Major banks may yet return, potentially cautiously at first and in different guises from before, initially focused on specific customer segments. The first green shoots are emerging now with renewed commitments to private banking and wholesale advice, operating beyond the retail regulatory lens.

The unbundling of the advice industry means there are now only seven Tier 1 licensees (including NTAA) – defined by CoreData as those with more than 500 authorised representatives on the licence, down from 12 Tier 1 licensees in 2018. This number will shrink further as IOOF absorbs the MLC advice businesses and advisers.

But as this Tier contracts, others are expanding, creating additional challenges for investment managers. The fastest growth is in Tier 2 – licensees with 100 to 499 ARs on the licence. There are 29 such entities. Significantly, these entities in total have broadly the same number of ARs on their licences as Tier 1 licensees, but to reach those advisers investment manager must have relationships with four times as many licensees.

But this is where to focus your gameplan, because based on current growth rates the number of advisers in Tier 2 licensees will soon eclipse the number of advisers in Tier 1 licensees.

And COVID has changed the rules anyway. Belly-to-belly sales and the building of interpersonal rapport and trust has largely been replaced with short-form online engagement. Perfect your elevator pitch and become the best digital citizens you can.

This is where the gold is, and the opportunities for investment managers to build new relationships with advisers have never been greater. Managers just need to understand where and how to pan for it.

CoreData Research

CoreData is a global market research consultancy and unique collaboration of market research, media, industry and marketing professionals.