What is in The Shop Window?
As fund platforms continue to form an important and lucrative distribution channel for fund managers, one dilemma they often face is whether to wait for demand from investors to access their funds via a platform, or to put their funds in the shop window, a service the platform availability provides, prior to looking for investors.
It’s a classic ‘chicken and egg’ situation. Mixing metaphors, a little, the chosen approach depends on whether you sit in the ‘build it and they will come’ camp or subscribe to the ‘generate demand’ approach to sales.
As managers construct or continue to fine tune their platform strategies, the recent spate of consolidation in fund platforms in Europe is raising an important strategic question for many asset managers: are they working with the right platform in the best places or have they spread themselves too thin?
Three Platforms Dominate
Although there are still dozens of fund platforms focused on the business to business (B2B) institutional market in Europe, consolidation in the last couple of years has produced a handful of major players, with three cross-border platforms dominating the market.
The largest, Spain-based Allfunds Group, combined with the Credit Suisse InvestLab in 2017 and in October last year, announced that it had also integrated BNP Paribas Securities Services, meaning it will administer more than $1.2 trillion in assets. Rival MFEX acquired RBC's global fund platform I&TS in 2019 after buying France's Axetis and Spain's Ahorro platform. Finally, Clearstream, Deutsche Börse's post trade services firm, bought a majority stake in UBS's fund platform, Fondcenter, in January last year. One question raised by these combinations is how they will affect pricing for asset managers? While there has been no public announcement related to fee changes, as these platforms increase their proportion of the market, it will undoubtedly strengthen their hand in any negotiations with fund managers. Understandably, taking the position that there are no other platforms with the same footprint in the market, an eventual increase in fees from these market leaders can’t be ruled out.
The traditional pricing model for platforms was based on the assets under management brought in by the platform. However, over time the construction of their fees evolved to both provide enough compensation for the fund manager’s onboarding, and as a bulwark against aspects of MIFID II regulation. This resulted in the introduction, and addition of, what have come to be known as platform fees.
A positive to this is that with a smaller number of platforms to onboard, fund managers can save not only on fees but also on legal costs, due diligence and vendor oversight. It also means that regular investors know where to go to get their funds and don’t have to trawl across a fragmented platform ecosystem as much as before.
It was not that long ago when many fund managers’ platform strategy was to simply place their funds on as many platforms as possible. The change in fee structure has now forced managers to be far more focused on costs, and therefore strategic in their thinking. Now, they narrow their platform universe down to those that suit their ability to raise assets. Gauging the return on investment on platform participation is increasingly important for fund managers and distributors alike.
Fund managers are now more likely to target the three main pan-European platforms, rather than trying to be available to potential investors on platforms more traditionally associated with a single market. On the other hand, some managers are concerned about their product getting lost on some of the bigger platforms where thousands of managers, and tens of thousands of funds sit side by side.
Ten Key Questions
The consolidation wave is prompting more managers to reassess their platform strategy. Here are some key takeaways to keep in mind when determining how to maximize the dollar spend related to platform access.
- What is the platform's geographical footprint? Are they really multijurisdictional? Some claim they are global, but in reality, focus on a particular area region, or limited jurisdictions.
- Do they align with your distribution growth aspirations?
- What’s their AML/KYC process on the buy side? Can you or your administrator leverage the AML/KYC exercise already undertaken?
- How many funds are on the platform?
- Do they have a methodology for limiting other funds of the same type as yours, or are you sitting adjacent with 4,000 similar funds?
- What’s their screening process for adding new products?
- What's the platform's policy as it relates to MIFID II’s ban on inducements? i.e. are they restricting share classes where this product feature exists?
- What auxiliary services do they offer? For example, some platforms are providing asset managers with transparency reporting in end investors, which is a major concern for most managers.
- Are they charging for these services?
- Does the platform have a preferred buy list they promote to buy side investors?
With their increasingly prominent position in the asset raising opportunities for managers, time spent formulating a well thought through strategy is time well spent.
BBH’s Market Intelligence team is made up of subject-matter experts whose function is to assist cross-border asset managers in executing their chosen fund distribution strategy by sharing insights on the fundamentals of cross border distribution. Our areas of expertise range ranging from regulatory considerations to evident distribution trends, as well as providing perspective on operational considerations across a spectrum of areas including:
- Product design
- Platform connectivity
- Regulatory adherence – i.e. registration/marketing
- Distribution opportunities – trends, research reports, and data
- Trailer fees and share class construction
- AML understanding
- Data dissemination
- Oversight requirements
Arrange a more detailed discussion on how BBH Market Intelligence can assist you in execution of your cross-border distribution strategy by contacting one of our subject matters experts or alternatively speak to your regular relationship excellence contact.