Is rise of direct distribution what Asia can expect?

Banks in Asia have been losing market share in the distribution of mutual funds, even as direct distribution in the UK has been rapidly gaining traction. Is this what Asia should expect in future?

Below you will see a comparative look at charts outlining the distribution landscape in Asia and the UK. Banks held a dominant 63.3% share of mutual fund distribution in Asia back in 2012. By 2013 that figure had fallen marginally to 59.9%.

But as at the end of last year, the market share of banks had fallen to an estimated 48%, including consumer, private and foreign (see chart, left). In other words, the data suggests the decline is accelerating.

Over the same period, direct fund sales increased their market share from 10.9% in 2013 to 12.4% in 2013 and 16.2% last year. It should be noted that the Asia data is heavily skewed by online distribution in China, led by ecommerce behemoths Alibaba and Tencent. In June 2014, Tianhong Asset Management launched the nation's first internet fund – the Yu'E Bao money-market fund – in partnership with Alibaba's payment system Alipay.

The convenience of parking money in Yu'E Bao at the click of a button has meant that one in seven people in a nation of 1.4 billion is now invested, driving Tianhong from being China's 52nd largest fund manager at the start of last year to its largest within six months.

Take out China and the trend to direct distribution will be less pronounced, but the direction and market momentum looks clear. Online distribution and engagement is only forecast to grow.

"While bank networks will continue to dominate [in the near term], we already see pockets of deviation from the standard distribution model," stated Cerulli. "There is a global trend towards robo-advice, business-to-business platforms and, more recently, direct-to-consumer platforms."

Amid a global push towards the banning of commission payments to distributors on fund sales in a drive to prevent product churn and conflict of interest for end-consumers, there are important pointers as to what Asia might expect.

In the UK, authorities enforced Retail Distribution Review rules in January 2013, banning fund manufacturers from paying inducements to intermediaries to sell their funds. The only commissions paid to advisers now come from end-investors.

Now UK data figures on distribution are revealing (see chart, right). They show that unintermediated/direct sales have a 22.5% market share, on a par with large banks with tied agents selling proprietary products. In other words, direct-to-consumer sales have soared.

Direct sales are on the radars of fund houses and regulators in Asia. Marie-Anne Kong, asset management leader at PwC in Hong Kong, said the industry had been studying several direct sales initiatives/platforms in Asia, including the Australian Stock Exchange-led mFund Settlement Service and Fund Online Korea.

mFund Settlement Service is a platform launched in 2014 that allows investors to apply for and redeem units in unlisted funds through a stockbroker. Fund Online Korea, launched in 2014, is an online portal that offers 900 domestic and global fund products with lower management fees.

“The industry is looking into these options with a view not to replicate but to see how these can be adopted to the Hong Kong environment,” Kong noted. “Discussions are ongoing, taking into account game-changers such as technological disruptions.”

The fact is, what has happened in the UK could be the shape of things to come in Asia, especially  with global pressure being applied to the payment of commissions to distributors.