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A new Disruption cycle in the US distribution landscape
A new Disruption cycle in the US distribution landscape

A new Disruption cycle in the US distribution landscape


Anne-Laure Couturier

Anne-Laure Couturier

Senior Strategy Analyst

BNP Paribas Securities Services

View profile
Disruption cycles are becoming shorter and shorter in the fast-moving US fund distribution landscape

Over the last few weeks, US asset managers have been purchasing robo-advisor platforms dedicated to the direct-to-customer (D2C) market with the intention of transforming them into business-to-business (B2B) solutions for banks and advisors. This trend may soon spread to Europe when you consider the key drivers behind this wave of acquisition:

- the high cost of customer acquisition
- the need for digital and low-cost solutions
- the upcoming inducement ban regulation

In the US fund distribution landscape, incumbents and challengers constantly devise new business models in response to the evolving industry, technology and regulations. Wire houses/Wealth managers, banks, brokerage/life insurance firms and Registered Investment Advisors (RIAs), have been facing disruption for years. Online brokerage firms, for example, won over tech-savvy investors with their electronic D2C platforms and low-cost models.

More recently, they have encountered another disruption from emerging new business models: electronic RIAs (eRIAs) and their so-called robo-advisors. The first movers that ventured into this field include Wealthfront, Betterment (on-line investment advisors) and Motif (social trading platform) or Personal Capital (on-line wealth manager). These non-traditional players benefit from the changing demographics and consumer behaviour that favour automated and passive investment strategies, simple and transparent fee structures, and attractive unit economics that allow low or no investment minimums. They typically target the underserved millennial generation, aka HENRYs (High Earning, Not Rich Yet).


Figure 1 - Click here to see full size image

Platforms - figure 1

AUM ($b) – Source: Cerulli, platforms websites


However, these new eRIAs now turn out to be vulnerable to disintermediation themselves: the recent arrival of asset managers into the digital distribution platform business is changing the US distribution ecosystem again. Last year, Charles Schwab and Vanguard launched their own robo-platforms. Only one year after its launch, Schwab’s platform has accrued nearly as many assets as Wealthfront and Betterment combined. At the beginning of 2016, Invesco bought Jemstep, Blackrock purchased FutureAdvisor and, by partnering with BBVA Compass, revamped the robo-advisor’s business model from D2C to B2B. The entrance of these large players in this area poses a real threat to existing eRIAs, since the giants already have scale, broad customer bases and established brands. This year, with a wave of acquisitions on the way, we will see the robo-platforms pivoting from start-ups-&-D2C model to corporates-&-B2B model, as the asset manager buyers turn them into B2B offering for advisors.

The fiduciary rule currently proposed by the U.S. Department of Labor (DOL) is also likely to contribute to this trend. The proposed DOL rule requires one fiduciary standard for the entire advisor industry and prohibits any third-party remuneration for advice to retirement accounts. The transparency of advisory cost will consequently enable much greater investor scrutiny of fees across product manufacturing and distribution, which will further encourage the use of low-cost and digital solutions that allow advisors to achieve economies of scale. Like the Retail Distribution Review (RDR) in the UK, this new regulatory package, once passed in Fall 2016, will prompt a redistribution of economics across the value chain in the US.

Those who benefit from acceleration towards low-cost passive investment products, such as on-line brokerage firms, robo-platforms and exchange-traded product providers, will likely be the biggest winners in this round of disruption.

Conversely, those product manufacturers who serve retirement accounts (both asset managers and life insurers) will be the most challenged. They will be prompted to take a position on digital distribution platforms to survive the DOL rule.

To keep boosting their assets and visibility, US asset managers may enter new territories such as financial planning and predictive data. Fidelity Investments is a good example of this evolution: By acquiring eMoney, a financial planning software provider, Fidelity was able to incorporate “Financial Planning Lite” into their asset management and provide its users more “in-depth” services including  account aggregation, billing, performance reporting and data analytics. The recent move by US Asset manager Huygens Capital, also reflects the emergence of more sophisticated automated offerings. With predictive analytics, Huygens takes robo-advice to the next level with its attempt to tactically manage a portfolio more like a robo-quant than a robo-adviser. Instead of only proposing passive products, new generation of robo-platforms will be able to take position against the market by overweighting equities or introducing alternative asset classes.

For US life insurers, who may feel the greatest impact from DOL rule and digital advisors’ competition, it will be critical to come up with innovative, data-driven approaches toward smart distribution.  Some are already testing the waters. For instance, US Life Insurer USAA partnered with Saffron, a big data and analytics company, to develop an algorithm that determines the right products to offer at the right time.

In the past few years, distribution platforms have become increasingly dominant especially in the US and have seen their flagship business evolve from pure order routing and fund processing to seamless investment and financial planning solutions. Meanwhile, regulatory change, social evolution and competitive pressure are driving product manufacturers to enhance their product distribution and regain their pricing power. Those who will have a successful digital distribution platform strategy will be prepared for upcoming changes.


Figure 2 - Click here to see full size image

Disruption - figure 2

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