The European fund landscape is set to change forever, with a narrowing of investment choices and a lack of fresh launches in the future, set to reduce the options further, following the introduction of MiFID II, according to the latest report by Cerulli Associates.
As a result of the changes, providing advice on a restricted number of funds is likely to become the model of choice for many distributors in southern Europe following the introduction of MiFID II, the report found.
The Cerulli Edge – Europe Edition report, published this week, says that while industry opinion is “somewhat divided on how open architecture will fare” , nce the controversial updated directive takes effect, the consensus is that “product choice will fall as a result of increased regulation”, making it more difficult to set up new asset management companies or funds.
As reported, the MiFID II regulation is set force ‘more than half’ IFA businesses to overhaul their business models, according to a similar study conducted by Investec.
This landmark MiFID II change is set to have a marked impact on distribution in Europe, primarily as a result of the new rules on product governance, the appropriateness test, inducements, and disclosure to investors, Cerulli said.
“In the wake of MiFID II we expect a more restricted form of architecture to largely replace the open one,” said Barbara Wall, Europe managing director at Cerulli. “However, even then, distributors will likely work with fewer asset managers. Third-party sales volumes may not suffer a significant fall in volumes, but the managers will have to work harder as there will be fewer entry points for sales and smaller buy lists.”
Southern Europe to be ‘hard hit’
A number of industry observers told Cerulli that they expect southern Europe in particular is likely to be harder hit than the north, mainly due to the dominance of large banking groups. As a result, these institutions are most likely to react to MiFID II by reducing access to third-party products.
However, the Cerulli reports stated that it “feels confident there will still be opportunities for third-party managers, even growing ones, particularly in funds of funds and sub-advised mandates”.
“It is largely the low end of the investor base that will end up with fewer third-party funds in its portfolios,” added Wall. “Investors of higher net worth will continue to enjoy access to the best of breed among funds and managers.”
New Italian tax exempt product
Among other findings in the report includes a focus on Italy’s new tax-exempt investment product, the Piani Individuali di Risparmio (PIR), which is tipped to provide a significant boost for fund managers in the country.
Although, Cerulli points, some advisors are worried that costs will outweigh the fiscal privileges and that the necessary Italian stock-picking talent will be “hard to come by”
Also, it added that having faltered last year, Spanish funds of funds seem to be “back on track”, after seeing assets rise by 442% between 2013 and 2015. The longer-term growth prospects for the distribution channel in the region are positive, but Cerulli warned that Spanish funds of funds, which, it says, tend not to be high quality, are vulnerable to outflows during market downturns.
Finally, Portugal’s asset management industry lacks in size, it makes up for in growth potential, connectivity to several diverse markets, and highly qualified personnel, added Wall. “We believe it is only a matter of time before assets under management return to pre-crisis levels.”