The recent FCA asset management market study and subsequent policy paper have brought the treatment of direct retail clients into sharp focus and presented asset managers with a pretty firm message that now is the time to review the treatment of this often-neglected client segment.
The acceptability of leaving direct retail clients to languish in high fee share-classes has been called into question and now more clarity has been provided by the FCA on what they would deem an acceptable remedy, asset managers across the industry are grappling with some key questions that constitute the retail conundrum.
Probably most important of these questions is deciding what the long-term strategy with regards to direct retail clients ought to be. Asset managers must consider that the retail investment landscape has shifted significantly since the retail books they continue to service directly were established in earnest. The prevalent trend in recent times has been for retail investors to gravitate towards independent direct to consumer platforms, such as Hargreaves Lansdown and Interactive Investor (other D2C platforms are available), as opposed to investing in an ISA or other wrapper provided by an asset manager.
There will be firms that choose to accept the shift in the retail distribution landscape and that it is not a viable or attractive growth segment like it once was. These firms must look at low cost alternatives to the traditional direct service model, to ensure they can continue to service these aging books of direct retail clients in a commercially viable manner, given the FCA’s clear indication the charges for these clients must fall. Failing this, a move to divest and/or transfer the clients to a third party may be preferable.
Where firms decide on a strategy of retention and maintenance, to ensure its success, there must be close control over execution. For example, avoiding temptation and morphing the development of a simplified online service into a fully blown all singing all dancing digital platform.
Those firms more optimistic about the prospects for growth in the retail segment will have to think carefully about what they do to give new investors a reason to break rank and go direct rather than to an independent platform. By opting to pursue direct retail investors as a growth segment, asset managers will be going head to head with direct to consumer platforms. Therefore, as a minimum, firms will need to match independent platforms pound for pound on value and breadth of proposition or differentiate the proposition sufficiently to overcome objections.
To match independent platforms or come up with a differentiated proposition will clearly require a greater degree of investment than a defensive play. Firms taking this course of action should do so eyes wide open to this and be pragmatic about; properly thinking through, researching and defining their direct to consumer proposition. Once the proposition is well defined and a case exists for its development, understanding the costs, associated development and project effort to bring it to market will be key. Failure to tackle these points up front is risky and likely to result in overspend on delivering a proposition that doesn’t hit the right notes with investors.
Whichever course of action asset managers decide to take, the recent policy changes from the FCA will be to the benefit of end investors. They represent a significant step in the right direction for an industry that has had serious questions raised by the regulator about how well it serves its retail clients.