The European fund industry faces a lot of change with regard to fund distribution, since European regulators are working on different projects to protect retail investors especially. One of the goals is to achieve “best advice” solutions for retail investors. Even though this seems to be a simple goal, regulators throughout Europe have different approaches. While in countries such as the U.K. we have seen a ban on inducements with the introduction of the so-called retail distribution review (RDR) or in The Netherlands where a similar regulation was introduced in 2014, in other countries such as Germany regulators still favour commission-based distribution models. Even the new European MiFID 2 regulation still allows commission-based distribution, but the regulator has made clear this regulation sets only the minimum standards and local regulators can go further to ban inducements.
For retail investors a ban on commissions means they have less access to financial advice, since many retail investors are not willing to pay a fee for these services. This means the number of self-advised investors will increase, and these investors will need clear and transparent information on mutual funds to make educated decisions for their portfolios. In this regard, the European fund industry needs to rethink its distribution model and information policy in order to keep these investors as fund buyers.
Even though fund information has been standardized with the introduction of the Key Investor Information Document (KIID), some fund promoters still do not really disclose what the fund is doing. You can still find fund objective descriptions such as “this equity fund is investing the majority of its assets (at least 51%) in equities.” Statements of this type do not help investors understand in detail what the fund is doing. Hence, I would assume investors won’t buy funds they don’t understand. It would behoove all fund promoters to disclose their investment objectives and information on their investment style within their sales documentation in a more clear and transparent way.
Another driver changing fund distribution (at least in terms of possible market share) is the Internet. With increasing use of the Internet people can find needed information right on the spot. In this regard, the European fund industry seems to be a bit outdated. Proper use of social media is quite rare, and—even worse—a number of fund promoters still do not include easy-to-access fund information on their websites. This could become a hindrance for doing business with all kind of investors; even professional fund selectors might want to analyze a fund late in the evening or over the weekend when they can’t reach the appropriate sales staff on the phone.
It is clear that fund promoters have to adapt their corporate communications, i.e., information about single funds, to the needs of investors. Otherwise, investors will buy products from those promoters who do fulfill investors’ needs with their information policy. Even—or especially—funds with superior performance need to become more transparent; performance is not everything. While performance opens the door, providing sufficient information and investor service seals the deal.
The views expressed are the views of the author, not necessarily those of Thomson Reuters.