1. Connectivity
The EY global distribution review
Volume 1, issue 1
Rise of the machines:
electronic platform distribution

2. Connectivity
Introduction to
Connectivity
T
his issue of Connectivity
a new EY thought leadership series
focused on global funds distribution.
Future issues will each concentrate on
a different aspect of the complex distribution
equation. Connectivity won’t necessarily offer
exhaustive answers or comprehensive solutions.
But we will seek to raise important points of
discussion, highlight key trends in the global
distribution of funds, and examine where the
industry is headed and how we think leading
practices can be implemented.
A large portion of the wealth and asset
management business model — particularly relating
to operations, risk management, technology
infrastructure, client reporting and portfolio
management — has been addressed from a cost
management perspective over the past decade.
True growth will likely be achieved only through a
Further, a rich landscape of vendors
providing an exhaustive range of services,
from marketing and compliance to
quantitative analytics and data management,
has developed extensively in recent
years. The crucial function that generally
Whether from a technology standpoint,
looking at the rise of electronic platforms, or
from a regulatory standpoint, looking at the
restructuring of remuneration models and client
interaction, fund distribution is undergoing
sweeping changes. For the industry, several
major challenges, such as the restructuring of
the compensation model, must be addressed.
Connectivity looks at
these many challenges, highlights the key issues
take to succeed at distribution globally.
| Connectivity October 20152

4. • Electronic platforms are slowly but inevitably
becoming a vital channel in global funds
distribution. Few asset managers can afford
to continue using distribution models from
entrenchment, as well as those that offer only
limited investor options.
• Interaction between counterparties to
exchange information and securities via
electronic platforms is nothing new in
wealth and asset management industry
services sector to fully leverage the power
of rapidly expanding technology and
transactions. Instead, distribution in most
asset management markets has focused on
personal intermediation with little attempt at
true innovation.
• Part of the slowness in adapting to new
distribution technologies and business
practices has been due to the entrenchment
models that left little incentive to radically
change the system. But widespread
regulatory reform of pricing models is
now sweeping the globe, notably the
Retail Distribution Review (RDR) in the
UK and Markets in Financial Instruments
Directive II (MiFID II) in the European Union.
in the industry. Thus the stage is set for
more distribution to move toward electronic
intermediation.
• Fund distribution platforms and their
respective rates of growth vary widely from
market to market — as does even the mere
industry may be thinking globally in terms of
must act locally to customize and leverage the
platforms used in individual markets.
Executive
summary
| Connectivity October 20154

5. • Perhaps the most advanced markets for
platform distribution are the UK and the US.
the late 1990s, a massive disintermediation
process began that moved investors away
At the other end of the development scale
sits Continental Europe, where universal
banks still control the bulk of the distribution
life cycle, and platforms primarily serve a
facing advisors.
• A successful platform distribution strategy
will require an aggressive and thoughtful
leveraging of social media, commitment to
building brand identity, a comprehensive
investor education program and a high
degree of personalization and enhancement
of the client experience. These drivers will
help to address the key challenge of product
differentiation — as well as build customer
relationships.
• Given the continued investment in
technology and automation of processes,
the growth of platform distribution will
inevitably squeeze pricing and margins.
largest global managers that can build
economies of scale — can attempt to enhance
or at least protect some degree of pricing
power, particularly through investment in
customer experience and building brand
of lower margins and increasing market
competitive pricing.
Rise of the machines: electronic platform distribution | 5

6. 0
1,000
2,000
3,000
4,000
5,000
6,000
TreasurySecuritiesPayments
November 2014 YTD2013201220112010
3,975 4,378 4,529 5,005 5,064
Issue 1 — October 2015
I Introduction
As far back as 1973, during an era when
paper forms were physically passed
from bank to bank and across vast
geographical distances, representatives
from a consortium of banks met in a
beginning of what is now one of the
oldest and largest electronic platforms
for Worldwide Interbank Financial
a shared worldwide data processing
platform and messaging link, along with
standardized terminology for international
payment processing and, more recently,
established an automated quotation
also entailed standardized terminology
of the capital markets industry was
only marginally interested in the then-
narrowed the bid-ask spread of securities
paradigm of securities trading that had
that the most effective model was one of face-
to-face intermediation between a buyer and a
data and transact payments for natural gas
6 | Connectivity October 2015

7. trading, announced its acquisition of the
rapidly losing market share to the global
monument to capitalism — a manifestation
of what was believed to be the utterly
essential process of physically connecting
Open outcry futures trading has fallen
to just 1% of the company’s total futures
stunning architectural monument of
management industry is essentially a
information backed up by a payment
been rebuilt several times over the last
rebuilt from scratch to keep up with
growth of computer processing power
and telecommunication bandwidth,
along with the corresponding collapse
of the marginal cost of that power and
bandwidth, has completely reshaped the
business model in many areas of banking
and capital markets is effectively creating
a cross-border electronic platform and
then leveraging it to win new business and
and securities trading have rapidly moved
the asset management industry has been
crisis, investors have often been left less than
time, they are increasingly well-informed
about products and prices, have far greater
before and are now largely comfortable
industry, like it or not, will shortly see the
inevitable rise and dominance of electronic
distribution platforms — alongside an
Rise of the machines: electronic platform distribution | 7

8. Megatrends driving the rise of the machines
Screen-based
automated
trading
Customer
experience
customized information delivered via the web over a personal meeting with
Regulatory
reform
Investor
dissatisfaction
Investor
sophistication
and
transparency
Investors, both retail and institutional, have far greater access to and
transparency is shining a bright light on what was once a highly opaque
Technology
infrastructure
II The stage is set
distribution model in asset management
was no doubt the entrenchment of an
distribution chain and were not transparent
their asset management services and
what precisely they were getting for that
laid the groundwork for the growth of
infrastructure, greater transparency
of information leading to far greater
elasticity of pricing, regulatory reform
and, ultimately, market preferences
have all combined to form the perfect
increasingly directed in one form or
jurisdictions, the traditional role of the
intermediary distributor will shift from
one of a commission-incentivized seller
of product, with marginal regard for the
cost of that product, to a new role of
sophisticated buyer acting on behalf of
market well, client-facing distributors will
implement their purchasing decisions in
much the same way a savvy supermarket
decisions will be based on quality of
products, brand name recognition,
generate vastly greater revenues than
boutique shops, the most rapid growth in
platform distribution will likely be seen in
platforms in operation today offer choices
from multiple asset management product
of these platforms, the advisor community
and the platforms themselves will likely
appearance that their platforms are a
Investment platforms will also become
increasingly important compliance tools
in the face of increasing regulation to
Issue 1 — October 2015
| Connectivity October 20158

9. Rise of the machines: electronic platform distribution |
protect consumer interests, such as the
Already, institutions are being required
to check that any advice given is suitable,
in the best interests of the client and not
offer built-in rules to prevent advice
automation of the compliance function
will allow more resources to be devoted to
only the disintermediation of traditional
facing advisor will soon shift from a seller
Advisors, such as private bankers, may
also want to move up the value chain and
start offering customized portfolios by
putting together a strategy based around
often owned by independent technology
companies and offering services similar
show signs of cutting out brokers and fund
managers completely, as well as changing
whether retail investors or client-facing
advisors, to use more digital channels to
to deliver more options, more services and
more information to clients and keep pace
mindset is fully embraced on an enterprise-
challenge, given that key stakeholders in
often built their careers working within
of funds via the platform channel to Asian
investors will likely outpace the growth
of the platform channel in the UK or
the rapid and growing rates of broadband
market penetration, smartphone-based
e-commerce and highly sophisticated
investors who are becoming increasingly
skeptical about the value provided by
Change is under
way in Asia
In Asia, most wealth management
services are delivered by the
universal banks, with more than
80% of funds sold face-to-face,
in formal meetings through
large institutions. At the same
time, buying behavior is mostly
performance-focused, with
investors chasing high returns
and advised through personal
intermediation.
However, the high rate of
D2C platform adoption and
use of mobile technology in
Asia suggests this traditional
distribution model is likely
to be disrupted. According
to data from US-based
Forrester Research, 83% of
Chinese customers use mobile
applications to bank online, and
73% use mobile applications to
invest online.
Europe
is characterized by a
closed architecture, with
banks and insurance
companies being the
dominant players selling
includes countries such
UK is at the other
completely open
architecture and
investors having a whole
range of distribution
channels to choose
are several countries
that lie somewhere in
Open architecture is prevalent, and growing, despite banks being the biggest
Latin America
In Latin American
countries, banks own
a major portion of
that the entrenched
distribution patterns
North America
done through open
architecture, and
the entire range of
distribution channels is
available in the region,
advisors, brokerage
companies, fund
supermarkets and direct
are done through the
9

10. III Regulatory change
drives restructuring of
pricing model
model in many jurisdictions inevitably
will also force asset managers and
distributors alike to aggressively improve
As client-facing advisors can no longer
be directly incentivized through revenue
sharing or commissions, the industry
channels to deliver more information
an entire class of investors — those with
limited savings — may effectively be left on
advice, and thus will likely be drawn
overhaul the entire remuneration system
within asset management distribution
debate about transparency of total fees
paid by clients began over a decade ago,
marked the end of a painful process for
process had begun as far back as the late
all, investment advisors should disclose
remuneration system for advisors was a
disclose and separately charge clients
clearly describe their services as either
independent — thus entirely free from any
any product line — or restricted, where
a connection or preference toward a
client-facing distributors is that they can
no longer accept commission payments
or revenue-share payments — in fact, any
payments — from asset managers for
distributors must be paid directly by the
clients for the advice given — and only by
also implemented a ban on inducements,
which are the fees paid by asset managers
to induce salespeople, investment
selling investment products to promote a
by regulators about how the established
suitability standard that governs the
advisor and investor should be heightened
already applies to registered investment
advisors, who are regulated under different
Issue 1 — October 2015
| Connectivity October 201510

11. Rise of the machines: electronic platform distribution |
complicate the regulatory outlook, it is
unclear whether the proposed changes
will apply only to pension and retirement
Wide-sweeping regulatory changes
what may prove to be one of the most
groundbreaking legislative changes
of the decade for the industry, the
implementation inevitable throughout the
now introduce the necessary national rules
for standards of investor protection,
client-facing distributors will be the shift
away from a sales commission-based model
the business development and distribution
•
advisors or discretionary portfolio
managers accepting or retaining
payments/inducements — effectively
banning payment or retention of
retrocessions or commissions to or by
independent advisors or managers for
distribution
• Regulatory powers to ban products —
likely to lead regulators to increasingly
focus on product development, oversight
and targeting of products
•
and appropriateness, particularly in
•
and loss analysis, but also potential
regulatory issues
Although the jury is still out on the
managers and distributors, some critics
have argued that small and midsized
asset managers could see new business
result of shifting consumer demand, more
transparency in pricing and the shrinking
landscape will be that a large number
of smaller independent advisors will
disappear — with the likelihood that
more business will be directed toward
larger advisors and those innovative
and nimble enough to adapt to the
new environment through aggressive
industry in general, the squeeze will be on
digital platform distribution channel and
leverage immense economies of scale to
toward strategic mergers and acquisitions
as a means of rapidly adding or combining
acquire a small technology startup
in order to rapidly gain cutting-edge
sophistication in electronic distribution
Further, as asset managers try more
aggressively to build brand identity,
enhance market share and capture
client wallet share, they are vertically
integrating into the retail market by hiring
more client-facing advisors, but not to act
targeted not so much to directly distribute
funds, but rather to help educate
investors about the product line and in
Increasing share of UK platforms in retail sales
Year Total gross retail
sales (million)
Direct
sales*
% of gross retail sales
UK fund platforms
Other
intermediaries
37%
11%
11

12. Article header
IV Today’s landscape of
electronic distribution
platforms
Globally, the asset management
industry is seeing several broad
business models emerging in
platform distribution:
Insurance channel —
consists of insurance-based platforms and
is centered primarily in the UK, Australia,
geographies, the vast majority of investors
get their investment advice from insurance
Fund platforms in these markets have
of the brokers who are actually placing
Advisor channel — the second cluster
advisors employed by the large wire
houses, as well as by independent
management discussions with private
clients usually gravitate around equities, so
the starting position for these platforms is
strong emphasis on trading and portfolio
wire houses or independent registered
investment advisors, largely turn to some
largest global asset managers distribute a
majority of their registered fund products
Private bank channel — the third
distribution of investment products has
E-platform acronyms
Platform model
B2B
B2B retail
Closed
architecture
Open
architecture
Guided
architecture
A platform that may appear to be open architecture in that it offers a large number of products from a very wide range of
D2C (or B2C)
Advised
platforms
| Connectivity October 201512
Issue 1 — October 2015

13. Article header
Rise of the machines: electronic platform distribution |
connect asset managers with client-facing
advisors have evolved to support multi-
invest in domestic and international listed
securities, managed funds, derivatives,
For some time, these general clusters
technology is maturing and enabling more
functionality, and technology providers are
integrating their services on a global scale,
the platforms dominant in one market
previously seen only in platforms in
software development, market forces are
pushing private banks toward ready-made
solutions offered by a handful of global
new software, asset management service
off-the-shelf vendor packages can deliver
fully comprehensive wealth management
software vendor landscape, off-the-shelf
packages should also become increasingly
of disintermediation and margin pressure
Investors across the spectrum, including
of private banks, will eventually start
what most automobile buyers do when
will be no set boundaries establishing who
an online insurance sales functionality and
multimillion-dollar investment accounts
Rapid and tumultuous paradigm
shifts for any industry are by nature
highly unpredictable, even by the
most prescient strategy consultants.
Engrained corporate culture, to
use the Peter Drucker cliché, eats
strategy for breakfast.
based cameras dominated the
global photographic industry, much
of the original technology behind
digital photography was invented
and patented by the world’s
largest photograph companies that
controlled an oligopolistic consumer
wallet share of the global market.
Digital imaging was a fascinating
science, but key stakeholders of
had been invented nearly a century
before. Now, some two decades
widely displayed in museums but
retail market, apart from antique
shops. Those corporations that once
controlled the photographic industry
are nowhere to be seen on the list of
the winners in digital photography.
Similarly, in the global telecom
industry prior to deregulation, large
network carriers held tight control
of consumer wallet share, in no
small part due to their frequent
status as former publicly owned
monopolies. No doubt, the network
carriers certainly dabbled in
wireless technology back in the
early 1990s. Nonetheless, the new
fad was widely seen as little more
than expensive toys for well-heeled
executives in chauffeur-driven
limos with a penchant for James
Bond gadgetry. Today, many of the
once-giant network carriers have
emerged from some sort of forced
restructuring over the last decade
and are nowhere to be seen in the
top tier of the wireless industry.
Many of the biggest winners in
wireless technology did not even
exist in the early 1990s or emerged
from unrelated industries such as
shipping or software.
In the decidedly unglamorous
low-growth industry of fast food, a
decade ago the conventional wisdom,
engraved in stone, was that the
basis of successful growth was to
spend heavily on TV advertising
and offer rock-bottom pricing and
steeply discounted loss-making
offers intended primarily to drive
Today, the fastest growing fast
food chains and the darlings of Wall
exist a decade ago, have spent
nearly nothing on TV advertising,
offer no discounts and have set a
pricing point at the very top of the
market. The lines to enter these new
national chain restaurants are often
consider them “fast food.”
The new global leaders in all of these
industries have one trait in common;
they long since took the granite
tablets upon which conventional
wisdom was once engraved, tossed
them all aside and never looked back.
Embrace radical change and
reinvention to survive and grow
Direct sales
Apart from the platforms that serve client-
facing advisors, the highly entrepreneurial
business model was born during the great
as a number of new websites began offering
the world of consumer-focused investment
platforms offers a far more robust client
13

14. investors turn to platforms to purchase funds
highly robust platform, call center support
and even some degree of an automated
electronic functionality, through what are
and offer purely third-party products, or they
| Connectivity October 2015
Platforms now dominate the UK fund distribution market, which has led to a state of ongoing evolution,
UK distributor Web address Minimum monthly investment
£
£
£
Bestinvest £
£
£
directed-service £
php £
£
£
£
Fundsnet
£
Interactive Investor
isa £
iWeb £
£
£
£
rplan £
£
£
youinvest
£
invest/home £
Willis Owen £
their own asset management products and
internet websites — that hold no assets and
operate more in the telecommunications-
In theory, the direct sales platform is the
nirvana for asset managers, with the direct
placement of fund products being the most
the largest national or global asset managers
14

15. can command the budgetary resources,
operate professionally staffed call centers
platform distribution, technology is
conquering the world, and the result is
created purely as independent technology
vendors are now starting to compete
directly for a certain segment of the
nontraditional entrants include new
stand-alone, independent websites that
Additionally, established global internet
search engine providers could soon enter
identity, massive economies of scale,
technology infrastructure and deep pockets
fund distribution process as primarily an
be that few investors yet associate internet
In terms of where this convergence of
platform models from one market to the
handling multiple asset classes, not just
tangible property, cash, alternatives and
platform convergence means the future
of wealth management across the global
household, with a holistic wealth package
designed to meet the desires, preferences
is driving toward a convergence of the
distribution of investment, retirement,
insurance, lending and deposit products
Rise of the machines: electronic platform distribution | 15
The present marketplace:
crowded, complex chaos
globe today offer a plethora of funds on
the shelf, but most of the funds listed are
most aggressive in terms of national
platform channel — as has often been
the case when working with a network of
Instead, asset managers must aggressively
support their product lines through almost
any means short of commission-based
compensation models in cases where
electronic platforms to the buyer, whether
that buyer is a client-facing advisor, a private
banker or a retail investor, will intensify
Buyers are increasingly willing to invest time
products on the shelf will mean that brand
names that are not relatively understood by
the market will lose the buyers’ attention in
favor of product lines that asset managers
have invested heavily in developing and
effectively communicated and branded
within the marketplace should align with
investors’ personal preferences, be delivered
at low cost for the given level of service, offer
investment performance tied to outcomes
and support the asset managers’ market
further highlight another key challenge
Advisors often cite the endless supply of
products from asset managers with a near
asset classes, such as large-cap active
establish product differentiation through
space that electronic platforms present
to investors, often leaving them confused
for choice, will necessitate product
differentiation in a way that is different
and that resonates to client outcomes not
rather than merely marketing short term
performance will be a key to differentiating
comparison, most users of automated
video streaming services, come away
needs were met and they received a
matchmaking internet dating sites, once a
taboo subject but now a mainstream sitcom
that then transmits binary code through
friend or professional advisor, however
personable and knowledgeable, is not at all
It has been all too common for asset
If the technology sector happens to be in
the headlines over the last month, product
distributors are all too quick to discuss
the range of technology-focused funds
and the latest and greatest tech fund
will increasingly turn to planning toward
shares — and pay management fees — for a
target-date fund perhaps for decades into
date funds have learned the need to simplify
purpose of target date funds to ensure the
market truly understands the product and
distribution platforms do not merely
communicate characteristics of the hottest-
investor with a more holistic perspective
focused on individual goals and personalized

16. | Connectivity October 201516
Issue 1 — October 2015

17. Rise of the machines: electronic platform distribution |
V EY predictions for
the future of electronic
platform distribution
• The status quo is not an option.
Restructuring of pricing models due to
a vastly more educated, sophisticated
and informed investor base make the rise
managers that relied purely on their past
market position and traditional sales
compensation models will be aggressively
will require substantial adaptation to the
growing segment of investors moving
away from personalized intermediation
solely and toward electronic platforms
to support and transact their investment
• Think global, act local. decades
ofincreasingglobalization,standardization
andharmonization,theassetmanagement
industrystillremainshighlyfragmentedin
termsofindividualmarketstructurewith
AsuccessfulplatformstrategyintheUK
fragmentedanddifferentiatedfromcountry
abilitytointerfaceaccordingtogeographic
anddemographicmarketsegments,aswellas
theirabilitytocustomizetheindividualinvestor
marketandcustomersegmentstrategyisa
notprevail;targetedinvestmentandfocusare
• Less is more. Asset managers will
be forced to review their products
and relationships distributed via the
support for fewer products will lead
to better preservation of margins,
enhanced competitiveness and greater
but deeper relationships, from both
the manufacturer and the distributors’
• Multichannel strategy and the
cannibal.
will look at platforms and their distribution
product sales through an electronic platform
may come as a result of a loss in sales
decisions will need to be made to determine
of, an omnichannel approach will test
the resolve of industry participants but is
• Think the unthinkable.
potent competitors in the funds platform
industry and have no background or
ventures or even a strategic acquisition of
the most promising tech start-up — as well
as a complete rethink of the primacy of
online investment advice portal, has
grown from start-up to break the $1 billion
in years past, the fastest growing and
aggressive start-ups in traditional brick-
taken over twice as long to surpass the
market’s interest in an electronic platform
• Millennials … lacking trust, yet liking
technology.
or seeking employment, they vastly prefer
an online interface for making spending
decisions — far more than any face-to-face
many major banks have downsized out of
the investment advisory business as the
key millennial market segment simply went
online to purchase funds and eschewed bank
proactively address this client segment now,
• Personalization and enhancing the client
experience. In the eyes of many investors
and advisors, there is limited product
differentiation in the asset management
industry, the trend of commoditization is
well-established, and all platforms provide
seek to allocate their time and assets to the
distribution channel where they feel they
themselves with a rich offering of content,
transparent pricing, digestible market news
In the US retail distribution markets, still tightly dominated by client-facing
advisors, several new web-based entrants are successfully gaining traction
in electronic platform-based automated advice, offering low costs and high
transparency:
Automated
investment
platform
AUMs Products and services
Financialplanning
Accountaggregation
Assetallocation
ETFs
Individualstock
Singlestock
Automatedrebalancing
Automateddeposits/
transfers
Dividendreinvestment
Wealthfront
Betterment
Future Advisor
17

18. | Connectivity October 201518
Contacts
Michael Lee
Leader
Alex Birkin
Advisory Leader
Rafael Aguilera
Advisory
Paul Stratford
Theodore Kim
Jeroen Buwalda
Advisory Leader
Juan Carlos Lopez

19. Rise of the machines: electronic platform distribution | 19

20. About EY
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