The president of Fidelity Worldwide Investments, Thomas Balk, says regulators’ moves to address perceived conflicts of interest between product manufacturers and distributors is good news for independent asset managers.
Balk, a 14-year Fidelity veteran, started with the company’s German office, before running its European operations for five years. A six-year stint running Fidelity in Japan followed, and Balk now looks after the manager’s global activities from London.
Reform goes global
He says reform of how financial products are distributed is becoming a global trend.
“One thing that’s happening is addressing the perceived conflict of interest between fund management companies or manufacturers – not just fund management companies, but all manufacturers of financial services products – and the people who distribute or provide the products to clients,” Balk says.
“Historically, distributors of the products have been paid by the manufacturers, not by the clients, and regulators are implying there’s an inherent conflict, because the client won’t always get the best product. The decision on which product he will be sold might be influenced by the manufacturer and how much it pays.
“The UK regulator was the first one, and they’re banning commission from January 1 next year, so financial planners cannot receive any commission payments from manufacturers, and they have to charge customers for advice.
“This is something which is happening in Australia as well. But in Europe, the UK kind of started that trend, and it’s happening in Europe with MiFID [the Markets in Financial Instruments Directive] as well. So I wouldn’t be surprised if in 2013 and the years ahead it becomes a global trend.”
Adapt or exit
Changes to how products are distributed are ultimately good for competition, Balk says.
“Financial planners will come under enormous pressure to demonstrate value they deliver, the value of advice,” he says.
“I think it will separate the weak financial planners from the strong, and we’ve already seen many financial planners exiting the business because either they are too old to go through the examination that the regulators want, or they’re saying I am not willing to go through this change.
“It’s happening. People talk about hundreds of IFAs [independent financial advisers] exiting.”
Another result of reform is that fund managers can only charge for the asset management service they provide, and intermediaries are far more likely to select products based on merit, rather than high commission.
“For an independent asset management company like us, we think this is very positive change,” Balk says.
“First of all, many IFA and financial planners are probably exiting the market [because they] weren’t that good. Good IFAs will survive; good financial planners will do well, which can only be good for customers. It can also be good for manufacturers because we do not have to worry about misselling or whatever.
“It will definitely open up competition and it means for us that we are selected on our merits, which is what we want, because we do not have any captive distribution channel. We’ve only existed for the last 40-plus years because of how we perform. We have no tied agents; we have no tied distribution network. We get selected only on performance.”
Balk says that for independent asset management companies, the reforms “are very good”.
“For captive asset management firms, it’s going to be quite tough. Reality is, other than in the US, most countries’ funds are being sold, not bought, and I think that selling part will be more driven by quality rather than pay-for-play.
“I think the regulators have woken up to the fact that this pay-for-play thing is not necessarily a healthy thing for customers.”