Industry Updates

Fee pressure will drive further index products use says KPMG survey

Scott Longley

The further regulatory focus on transparency of costs that comes with the introduction of Mifid II is likely to drive further usage of index products, according to a new survey conducted by KPMG on behalf of BlackRock iShares.

The survey of over 130 wealth managers found that 55% of all respondents believed that regulatory change would be the most critical driver in the next 12-24 months and the same percentage believed fee pressure was the most critical factor.

The threat of disintermediation is also clearly a worry with 46% of respondents saying the further introduction of consumer-facing apps and services would be the most important change ahead.

Joe Parkin, head of iShares UK retail and wealth at BlackRock, said it was evident the UK wealth management industry realised the twin drivers of transparency and costs were increasing in importance.

"With the UK wealth industry undergoing significant change as a result of technology, changing regulation and fee pressure, advisers and wealth managers are at a crossroads," he said.

At the Inside ETFs conference last week, the manager of exchange traded products at the London Stock Exchange said a new level of insight into fund flows that will come as part of the introduction of Mifid II at the start of next year will for the first time provide a clear signal for the liquidity levels of ETFs.

The second iteration of the Markets in Financial Instruments Directive (Mifid II) which comes into force on 1 January 2018 will see the introduction of consolidated tape providers (CTPs) across all European exchanges for the first time.

The KPMG survey found that among discretionary wealth managers and private bankers, Mifid II would have a more far-reaching effect in the UK than RDR which largely passed them by.

The report said many felt the regulation would lead to increasing price transparency and consequently greater client scrutiny of the underlying portfolio.

"This scrutiny could result in more use of index investing products, and indeed potentially more direct investments amongst clients looking to remove a layer of cost from portfolios," the report's authors added.

A slight majority of 52% of respondents believe their business will become increasingly digitised in the years ahead and think that robo-advice offerings will complement their own businesses rather than replace traditional methods of face-to-face wealth management.

The report said many investors foresee a "race to the bottom" on robo-advice pricing similar to that in index investing but noted that scale will be a must, something that is unlikely to come from the new entrants proliferating in the market.

The survey found that current use of index products within client portfolios varied greatly among UK wealth managers with the percentage in index products ranging from 1-2% to 70-80%.

Financial advisers are the most likely investor type to invest more than 20% of a typical portfolio in index products. Wealth managers were the least likely to have this high a proportion of a portfolio invested in the same.

'Natural limit'

The survey found the "natural limit" for the percentage of a multi-asset portfolio that should be allocated to index products was between 30-40%. A third of all respondents said that they had portfolios that were wholly index products and 39% said they expected their use of index products to increase in the next two years. A total of 67% said fee pressure would be the reason for this change.

As the report states: "Consensus across our research showed that zero use of index products is not a good idea. Even ardent supporters of active investment recognise the benefits tactical allocations to index products can bring, even if proportion of assets under management is small."

ETFs were the most commonly used index products, according to the survey.

Tim West, head of asset management consulting at KPMG UK, said the evolution of the wealth management space was evident from the survey. "The market for index products has exploded in recent years, and the findings help to uncover the drivers influencing this growing segment of the market and make an educated projection about what the future might hold for index products in the UK."

The respondents of the survey manage a combined £4.5trn on behalf of clients. The quantitative element of the survey involved 105 respondents from the financial advisory, wealth management and private banking sectors. This was complemented by face-to-face interviews with a further 30 interviewees.

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