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Shifting market dynamics and the rise of “disintermediation” – how investor relationships with advisers and introducers are changing

22 February 2017

Shifting market dynamics and the rise of “disintermediation” – how investor relationships with advisers and introducers are changing

The traditional role of the intermediary adviser as the lynchpin connecting private investors with investment products is changing. Lower-cost “robo-advisers” have disrupted traditional discretionary fee structures and increased competition for advisory services, changing what “advice” looks like and the way it is provided. At the same time, clients and product providers are increasingly interacting directly via online and offline platforms rather than going through conventional introducers – P2P lending being an obvious example. “Disintermediation” may not yet be a common buzzword but it’s a trend which is gaining traction within private wealth management.

There are several causes behind this phenomenon.  In my view, the ball was set rolling by the FCA’s Retail Distribution Review banning commission and imposing greater requirements for advisory qualifications, causing many advisers to drop out of the industry. But this was just the start.

Polarisation of the advisory market

The advisory market has polarised. Advisors serving the mainstream, volume retail market offer valuable guidance and expertise in areas such as pensions and life assurance, but when it comes to investments, they tend to offer mainly “plain vanilla” opportunities. This is fine for most retail clients, but such an approach may not suit more experienced, sophisticated investors who are seeking to create greater diversification and want their portfolios to have some exposure to alternative, potentially higher return assets. Deviating from what retail platforms used by advisors offer as standard is not that easy. The reality is that most retail investor business models are based on clients selecting from a set menu of options – anything above and beyond that is straying into bespoke territory, seen as more the preserve of the private banks.

Private banks, however, are increasingly focussing their attention on the most profitable ultra-high net worth clients, as growing costs make it uneconomic to offer discretionary services to any but the very wealthiest. This is leaving a swathe of experienced HNW investors with diverse and specific interests and varying levels of risk appetite underserved in the middle. Who is catering for this section of the market now?

To some extent, robo-advisers have stepped into the place of conventional intermediaries in this area by using profiling technology to create automated ‘personalised’ portfolios online at a fraction of the usual cost of a traditional wealth manager – although the extent to which this constitutes advice is debatable. However, like IFAs, their business models are highly dependent on volume, with investment options based on a pre-defined panel of opportunities within set risk categories. Whether this “bespoke-by-numbers”, tech-centric approach is really appropriate for those investors who want to cherry-pick from the full investment spectrum is a moot point. High marketing costs and plenty of competition make this nascent sector of the FinTech industry a challenging one to make profitable and with market leaders Nutmeg now reportedly cutting fees to attract clients, some might question how sustainable the robo-adviser model is in its current form.

Accelerating demand for direct access to products

However, alongside the disintermediation of advice, we are also seeing another trend gaining momentum – the disintermediation of product – where transactions between product providers and investors take place without the aid of an adviser. A new generation of innovative product providers who aren’t reliant on intermediary distribution channels to get products to the end investor are developing an ever-wider range of opportunities to meet different requirements and risk profiles on a direct-investment basis - and bringing down costs as a consequence. From low-cost, direct-access equity funds, to “experienced investor collectives” through which private investors can invest in alternative asset funds or back established, later-stage SMEs, to P2P platforms, disintermediation is starting to impact the whole investment spectrum. Effectively, private investors are increasingly able to cater for their own needs.

It’s access that is the key to this revolution. Although there has long been demand for self-selection, previously the availability simply wasn’t there on any kind of scale. Investors may have been able to source opportunities through their own networks of contacts but open market options have been extremely limited – until now. Of course, not everyone has the time, expertise or appetite to identify suitable investment opportunities or take charge of the contents of their portfolios for themselves, but those that do are finding it a liberating experience. As this trend accelerates, it represents a major area of opportunity for the financial services sector.

As shifting market dynamics transform the wealth management and financial advisory industry, traditional client/adviser/product provider relationships are being broken down. In between retail investors and ultra-wealthy clients, there is huge demand from HNW private investors for attractive, risk-adjusted returns delivered by high quality products. If these aren’t on offer from intermediaries, they are increasingly able to source them for themselves through a range of direct channels. The benefits for both investors and product providers are clear: it’s an efficient, transparent and straightforward way of interacting. All in all “disintermediation” looks like a trend that’s set to continue.

By Claire Madden, Partner, Connection Capital LLP

 Russell O'Connor
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