Going direct: the evolving fund manager distribution model

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Technology may well make the distribution channels of the past, such as IFAs and other intermediaries, a thing of the past. As big fund managers have tried for many years, going direct to the retail investor is becoming increasingly viable, according to an award-winning white paper by tech services company Calastone.

The paper, ‘The Digital Fund Distribution Revolution’ won the best ‘thought leadership’ effort at the annual Investment Week UK fund services and investment research awards in London last week. The white paper outlines many of the changes in the industry, particularly new technologies, and their likely impact on the way managers and other service providers distribute their wares.

Calastone describes, albeit briefly, how the whole funds management market can or will migrate to distributed ledger technology (blockchain).

“Through such a model, a fully linked trade lifecycle (order – settlement – payment and post trade services) become smart contracts, applied to the marketplace. Reconciliations can occur in real time as the transaction chain cannot be broken. Data transparency becomes a standardised view on the blockchain with permissions allocated to protect visibility and privacy,” the paper says.

“APIs enable participants to interact with the ledger supporting value-added services to their core business and importantly enabling each to build differentiation. Such normalisation of the market place makes it possible to change the market structure and enable new services which can be universally adopted by all participants.”

Calastone has created what it calls a “design group” to work on a distributed market infrastructure program. It has been working on distributed ledger technology since 2014. Blockchain is the central plank in the program but other tech advances are also included in their studies.

The paper says: “By taking advantage of technology enablers such as Cloud Computing, Software as a Service (SaaS), Big Data and Distributed Ledger Technology (DLT), it is possible to envisage a future state model which addresses a number of the challenges facing the industry today.

“DLT (blockchain) provides a single source of truth on an infrastructure that can be fully distributed across many participants in a market. When combined with smart contracts, or self-executing agreements based on pre-defined conditions, this creates a digitised and distributed infrastructure where all market participants agree on both the data and the outcome of running smart contracts.

“Distributed ledger technology clearly demonstrates potential to facilitate new ways of working. Inherent challenges driven by market fragmentation must be remedied otherwise the funds industry as it exists today is at serious risk of being disintermediated. DLT is viewed as a remedy towards disaggregating the fragmentation across fund distribution by creating a common system or infrastructure for all parties to interoperate.”

In an industry-wide survey undertaken by Calastone last year, 45 per cent of respondents agreed that direct-to-consumer distribution channels would take over from traditional channels, such as IFAs and banks as the main way fund managers would raise money for investment.

– G.B.

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