“The asset management value chain is long and complex,” Cerulli said, in a note outlining the findings of its latest report, which is contained in its Q1 Edge-Europe Edition.
“Few houses can afford or are able to do everything themselves." Some are responding to the growing regulatory burden by outsourcing to fund managers, while discretionary portfolio managers are expected to benefit, “as commission-based models crumble”.
Angelos Gousios, a Cerulli senior analyst, said one of the most remarkable findings from the research was “the consistency of what is being outsourced most for different bits of legislation”.
For example, he noted, “the AIFMD is very different to EMIR [and] FATCA” – which is not even a European set of rules – “or MiFID II, but updating technology and document production… are the functions most likely to be outsourced".
“Solvency II produces slightly different results, with the sheer volume of data needed to be sent to insurers skewing results."
The outsourcing makes sense, Cerulli noted, because fund managers “are there to manage funds, not run servers or decide whether to upgrade to Windows 8” or produce “monthly fact sheets in multiple languages in a timely fashion”.
Meanwhile, outsourcing the business of fund selection is also growing in response to the increase in regulation, the Cerulli research reveals, particularly in the UK, in the wake of the Retail Distribution Review (RDR), with its ban on commissions.
'Pan-Europe opportunity'
"Even if MIFID II does not result in a commission ban, if the French get their way, other countries may still follow the United Kingdom with their own domestic rules," said Barbara Wall, Europe research director at Cerulli.
"If so, asset managers spy a pan-European opportunity. Advisers will not want to select funds for clients, so they will outsource. In the United Kingdom, discretionary managers are thriving by offering a host of graded portfolios for the job."
According to Cerulli, model portfolios targeting what it calls the "offshore crowd" are "relatively unsophisticated" and often come "wrapped in expensive, unnecessary insurance-product blankets, as selling rules (and standards) are weaker".
But, it notes, as regulation and practice pushes intermediaries towards "servicing their client relationships, not just selling products", the unbundled fund and outsourced selection trend "is spreading, from Geneva to the Middle East".
Other findings from the Cerulli report:
- When it comes to initial set-up costs, Solvency II looks "eye-wateringly expensive"; insurers "will need to know much more about the assets they are invested in, requiring a herculean push to set up data systems", while "any fund manager who services these institutions must adhere"
- UCITS products are gaining traction in Latin America, thanks to regulation and the growing appeal of the brand among local managers
- Chile represents the largest opportunity in LatAm, as it allows the direct sale of UCITS, and local pension funds are making "good use of that"
- Chilean private pension funds (AFPs) had more than $60bn (€43.9bn) invested in cross-border vehicles, including exchange-traded funds, at the beginning of 2013, and Cerulli expects total exposure to cross-border vehicles and ETFs to rise to more than $150bn by the end of 2017
- While onshore private banking will be a growing channel, offshore booking centres "will continue to be an attractive place to do business". Those seeking to chase hidden assets in other offshore booking centres, such as Singapore, "are unlikely to turn up trumps"
To read about Cerulli's Q4 report, in which it examines how international fund groups "are making fresh inroads into Spain and Italy, as investors push for access to third-party funds", click here.
To read how Cerulli experts have described as "overstated" industry concerns over plans to create a mutual recognition fund market between Hong Kong and China, which ultimately could be expanded regionally across Asia, click here.
