There’s nothing like sitting in a room full of American fund managers responsible for managing the nation’s US$21 trillion funds under management to understand Australia’s place in the world.
In the first week of May, I spent three days in Washington DC attending the Investment Companies Institute (ICI) conference. One speaker, who gave an otherwise expert analysis of how Asia will shape the world, had even left Australia off one of his maps. While managing a significant and fast-growing volume of investment funds (or mutual funds as the Americans call them) - we are the largest fund manager in the Asia-Pacific region - Australia’s $2.8 trillion funds under management pales somewhat in the shadow of the American wealth leviathan.
Speaking on a panel run by ICI and EFAMA (the European Fund and Asset Management Association) I updated colleagues on recent changes to distribution in the Australian market. Commissions still overwhelmingly abound in the developed markets of the world where total global mutual fund assets are US$46.7 trillion. Australia is only one of four countries to ban commissions (the others are the Netherlands, South Africa and the UK) whose markets, with Australia, represent just 10 per cent of the US$46.7 trillion in global FUM.
I explained that advisers and the distribution model in Australia was undergoing massive change thanks to several factors: the after-effects of the Royal Commission; increasingly muscular regulators; new laws; progression to radically elevated education, disciplinary and professional standards; the end of the major Australian banks’ vertically integrated wealth model and the impending death of post-FoFA “grandfathered” commissions. I explained that while advisers are transitioning to a fee for service model, we do not yet know the true cost of advice in our market.
What about robo-advice? While there were some promising new products, Australia’s self-directed market was as yet relatively unsophisticated. I also explained that while the reforms and changes could mean thousands of Australia’s 28,000 advisers would exit the sector, there is a stream of university graduates entering the industry, and it was our strong view that Australians would always need professional advice, particularly as they entered retirement, as it significantly enhanced their wealth outcomes. In Australia, 700 people are retiring every day, and over the next decade, it is estimated there will be $100 billion transitioning from accumulation phase to decumulation.
Broadly, the ICI conference focused on the increasing burden of regulation across business and particularly financial services in every market across the world. UK colleagues complained that their regulators focused excessively on lowest fees, instead of best value, which distorted the public debate. Post-Brexit discussion with T.Rowe Price’s Bob Grohowski and Citi’s Sean Tuffy centred on the fact that Brexit has affected almost every aspect of the value chain for funds, from delegation of portfolio management, cross-border distribution of funds – and that large fund managers have already moved their teams from London to Luxemburg and Dublin. There was discussion that some may look at new, less burdensome investment regimes like the Asia Region Funds Passport, as they weigh the cost of the EU’s MiFID II enhanced regulatory effects on UCITS.
Thomas Richter, CEO of BVI, the German Investment Funds Association, released research which showed that the regulatory requirements of MiFID II prevented people from investing and stifled competition and innovation.
The BVI research on the effects of MiFID II found that clients:
- Dropped telephone orders by 50%
- 69% considered ordering of securities too cumbersome
- two-thirds did NOT feel better informed
- 75% saw no benefits in legally required documents and wished to waive them; and
- 27% of clients will abstain from investments in securities (including funds)
On the banking side, the BVI research found:
- 84 % of banks offer less individualised but more standard advice
- Implementation costs are 3-5 trillion Euro
Jay Clayton, the US Securities and Exchange Commission chairman, in conversation with the ICI’s CEO Paul Schott Stevens (a former Reagan White House adviser) told delegates that the increasing trend towards the privatisation of public markets had focused his mind on retail investors needing to continue to be able to access public markets and growth opportunities. The SEC, Clayton said, was making IPOs easier and transparency for retail investors greater. He acknowledged that “when regulators act, we do have to be cognizant of whether we’re creating barriers so only the big can win.”
On ESG investing, Clayton said the SEC has a role to play, but he didn’t like “lumping E, S and G” together, preferring to focus on S (Social). “The importance of human capital has increased across the world. We need to listen to the questions investors are asking of diverse companies.”
We learned more about fintech from Yale-educated Alibaba co-founder and executive vice-chairman Joseph Tsai. Tsai, who owns the Brooklyn Nicks, said that Alibaba’s Ant Financial and Yu’e Bao, its money market fund, were examples of new financial businesses with a close and direct relationship with consumers. Facebook would soon start a financial services business, he said, again, with direct B to C engagement. “Everyone is thinking about consumers.”
On the US-China relationship, Tsai used the story of Thucydides to make the point that a rising power doesn’t always have to make the powerful powerless. “China is hugely powerful economically. The US can’t cripple China by trying to crimp its economy. I take issue with the narrative that China is taking jobs away from Americans. The relationship between the two is, and always should be, a symbiotic one.”