At one time, Europe was considered the trendsetter in fashion, design and political thought. Now, a new study by Greenwich Research shows that Europe is leading the way in fee reductions and introducing new investment products centered around ETFs and specialized funds.
The reason for the re-positioning is due to Europe’s new economic realities. The 2011 European Intermediary Distribution study found that in order to remain competitive and provide a buffer to investors in a volatile environment. Specifically, the study found that managers are introducing “alternative and thematic funds, a rapid pickup in exchange-traded fund (ETF) sales” accompanied by “dramatic reductions in fees in active product — especially in core equities.”
The push into ETF allocations will come across all distribution channels, the study found. European retail banks project a “significant increase” in ETF sales, from current ETF allocations of 4.2% of third-party assets to 12% by 2014. ETFs have become popular across all intermediary channels especially among private banks, where 20% of third-party assets are now invested into ETFs.
“Investment managers are coming to market with new ETFs because these products align well with changes in customer preferences and demands, including a growing emphasis on costs and fees and a desire to gain specific desired exposures,” said Greenwich Associates consultant Lydia Vitalis. “Regulatory changes, such as the Retail Distribution Review (RDR) seeking to ban commission in the U.K. retail market, will bring about changes in the distribution landscape that will likely increase interest in ETFs further.”
Focus on Fees
The study found that actively-managed funds being sold by intermediary distribution channels carry fees in the 150 basis point range, but in this new economic environment, some investment managers are offering active-management for as low as 40 basis points. The change is being made because investors are focusing on minimizing expenses accompanied by “managers’ growing willingness to sell low-cost, beta-focused products suggests that additional fee compression is on the way.”
“We anticipate fees on core equity products to come down dramatically,” says Greenwich Associates consultant Marc Haynes.
Increase in Third-Party Distribution
Since the back office often drives more innovations than the front office, European managers are pushing the trend towards open architecture. The U.K. stands out as the most “open” market with 81% of assets in third-party product, which is consistent with the prominence of the U.K.’s independent financial advisor (IFA) industry.
Back in the USA, More ETFs in 401(k)s
Back in the U.S., the 401(k) market now has a new way for participants to invest in ETFs. A patented new platform introduced by Invest n; Retire o Portland, Oregon, The new system includes an online calculator which offers plan participants the ability to simulate returns and asset allocations based on ETFs using specific asset allocation models.
The new product’s key feature is its ability to use regular payroll contributions to selectively buy underweighted ETFs in the portfolio, so an employee’s asset allocation model maintains its balance, in what the developers call a Self-Aligning Portfolios.
“Now, with a single click, the calculator tells the employee if he or she is on track for retirement. If the results indicate a shortfall, the calculator offers a few changes to consider implementing in order to get on the road to retirement success,” according to Darwin Abrahamson, founder and CEO of Invest n Retire.
“Up until now, everyone essentially only offered mutual funds which operate on antique systems developed back in the 1970s. Realistically, the retirement industry is suspended in a time warp.
“With our patented technology the industry no longer has to be constrained, moving forward with modern technology and better investment choices – ETFs. Our approach to solving the countless problems facing the retirement industry is unprecedented.” Abrahamson said.