Fund supermarkets set to take hold in UK

While master trusts are a big part of the local scene they have yet to make a real impact in the UK market. JASON SPITS looks at why the market is set to change in the next five years.

Australia still shares many things in common with the UK, and while master trusts in that market may differ in name, having been labelled as fund supermarkets, there are some strong similarities developing.

US research house Cerulli recently examined the Australian market and reported that it is set for a period of strong growth and consolidation and this has been echoed in similar research done on the UK market.

According to Cerulli estimates, by 2004 at least 25 per cent of new net inflows to UK unit trusts and managed funds will come from emerging fund supermarkets in Britain.

According to the report, Trends in the U.K. Retail Fund Management Marketplace, this represents a large slice of a market that is set to grow from more than £265 billion (A$730 billion) today to £555 billion ($A153 trillion) by 2004.

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At the same time a growing portion of unit trust and managed fund inflows will come through independent financial planners and advisers with many using fund supermarkets to channel those funds.

The report suggests the figure could be as high as 65 per cent of inflows in 2004 coming from advisers, up from 51 per cent at the end of 1999, as they make use of fund supermarket platforms as back office solutions for their own practices.

However for British planners to make the shift to fund supermarkets - and for the bulk of funds to be routed through them and those products - implies a major phase change for the retail financial services industry in the UK.

This is exactly what is occurring, according to Cerulli consultant and primary author of the report, Thomas Marsh. He says there are a number of drivers that are making the fund supermarket a viable distribution channel with the movement toward open sales channels as one of the chief reasons.

This has occurred because the UK market is very much like the Australian market was a number of years ago with tied distribution lists restricting the products available to the adviser.

"People want choice when they are buying directly and when they use a financial adviser. In this light fund supermarkets are being used as a back office platform by advisers to provide a single window to many products," Marsh says.

Oddly enough, this ongoing demand by consumers for a more open system with greater choice may also drive the industry further. This should occur as demand for access to multiple products increases the administration and record-keeping burden for unit trust providers, forcing them to develop newer distribution platforms that will further attract retail fund investing.

The changing face of consumer demand and product distribution has also begun to change the way advisers are working, according to the report.

"Intermediaries are increasingly realising their value is less entwined with information and execution as it is with advice and guidance, forcing many to increasingly promote objectivity," the report says.

"Greed is motivating advisers to see themselves less as agents of a home office and more as individual practitioners who want to retain more of the revenue they generate."

As evidence of this, Marsh found that a greater number of British advisers were more comfortable with charging fees for advice instead of being dependent on trail commissions. Although fee charging is still a relatively small practice, Cerulli survey data shows that 35 per cent of respondents were considering adding such fees to their compensation systems.

While advisers go about restructuring their industry, some uncertainty and confusion seems to have also taken hold in those rolling out the fund supermarket products.

According to Marsh, very few fund supermarkets exist with the remainder considered by Cerulli as order routers or incomplete product offerings.

However Marsh says the difficulty in putting together a product that meets the definition of a funds supermarket is often the result of lagging technology.

"Back office and clearing and settlement issues are antiquated and archaic and some of the players that have come to market are looking at some of these issues and have gone away stumped," Marsh says.

"You can't just take a system that worked overseas and import it into the UK. You have to have a different solution. Similarly, independent financial advisers and funds management are very much cottage industries and that frustrates the proliferation of the idea of fund supermarkets as well."

Nonetheless, Cerulli is still confident that these hurdles are being overcome and expect an explosion of products to roll out onto the market in the first half of 2001. However it also expects most to wither away again within three years, dropping from around a dozen to perhaps three or four products.

The report also forecasts that this handful of platforms will represent 90 per cent of all UK retail fund assets attributable to fund supermarkets, but even those out on the market will not be guaranteed a chance of survival.

"There is a degree of first mover advantage and in that category a few offerings have stolen a lead on the pack, but that's not the whole story. They still have to deliver a whole range of services and funds as well as security and reliability and performance returns," Marsh says.

According to Marsh, those left standing in the dominant market position will be fund supermarkets that are simply the best of breed, regardless of country of origin.

"It is still too early to determine the identity of the dominant British fund supermarkets but vendors entering the marketplace after the first quarter of 2001 are increasingly less apt to lay claim to the significant fund supermarket net new inflows."

"We believe the most successful platform will have the best service, the widest variety of investments and have competitive pricing. It will also serve the consumers directly as well as the financial advisers."