What is the future for distribution?

FundForum NextGen Distribution

FundForum NextGen Distribution

WHAT IS THE FUTURE FOR DISTRIBUTION? 1

FundForum NextGen Distribution

CONTENTS Tech: Threat or opportunity?

Big data and automation: drivers of fund distribution evolution ................................................................... PAGE 5 Back to the source: what is driving the digitization of fund distribution platforms?................................................. PAGE 7 Delivering growth through innovation in the era of FinTech........................................................................................... PAGE 9

Regulation: The next big disruptor?

Making compliance work for you in an era of change.... PAGE 12 Is regulation the next big disruptor?....................................... PAGE 14 The DOL Fiduciary Rule: Adjusting operations and procedures to comply.................................................................... PAGE 16

Will the customer of tomorrow change the future of distribution?

What does the future of customer engagement look like?............................................................................................. PAGE 19 The Change Horizon: Thriving amid disruption in the value chain................................................................................. PAGE 22

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FundForum NextGen Distribution

WELCOME Boston was home to a collective audience who came together to explore fund distribution disruptors and the strategies needed to respond.

Taking insights from forward thinking asset managers, FinTech specialist and non-industry experts, FundForum Next Gen Distribution key discussions included the thriving amid disruption in the value chain, how gamification will change the wealth management industry and delivering growth through innovation in the era of FinTech.

of investment decision-makers. This eBook provides insights into these key take-aways.

With executives, innovators and employees bringing a positive change to their organisations the future shows businesses will be better positioned to meet the needs of their customers of tomorrow.

James Roberts, Business Development Director, FundForum Global Series

We can take away that as an industry we require new distribution strategies and models as the demographic shifts change the composition

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TECH: THREAT OR OPPORTUNITY?

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FundForum NextGen Distribution

ARE BIG DATA AND AUTOMATION DRIVERS FOR THE FUTURE EVOLUTION OF FUND DISTRIBUTION?

LOREN FOX, Director of Research, Ignites Research (Moderator) GERALDINE GIBSON, CEO, AQMetrics RICHARD GARLAND, Managing Director, Investec Asset Management CON WAY LING, Marketing and Business Development, Artivest ROBERT BEHAN, President and Head of Global Distribution, Calamos Investments This panel evaluated trends in technology, the nature of the advisor-client relationship, and factors in sales force behavior that influence the adoption of new tools for managing processes and data in the financial services environment. While technological change has been rapid, the panelists did not believe, on the whole, that human advisors will be replaced by machines any time soon. Instead, better faster and smarter machines will simply assist in the work flows and leverage the time of their flesh and blood counterparts.

The Foundation of Big Data At the root of any CRM system is the core data – it may be what you enter in yourself, what you can find on the web, what may be purchased commercially, or what has been imported from other databases within or outside of the firm. The key to data management is that repositories must have good connectivity to the CRM system and the schema, types of data and how they are presented will be compatible or at least require minimal adjustment.

With the proper setup, the data will be linked in useful ways and can lead to greater productivity and enhanced ability for segmentation, resulting in a higher level of client service and increased sales. As one panelist put it, “That’s what we all want as distributors.”

We are just not focused enough in the asset management industry. We are not, in our essence, technology firms.

Who is in charge? – the Chief Data Officer In the modern data management and analytics scene, the ideal structure is to have one data czar who oversees everything. However, in financial services, many firms are still not there yet. Many firms have multiple executives involved and precise lines of responsibility are not clear. If we ask, “Who own the data analytics strategy?,” it might be marketing, performance, or finance. In some organizations, people are reticent to claim the territory, but they do have a data center and will have to reach a decision someday. “We are just not focused enough in the asset management industry,” said one panelist. “We are not, in our essence, technology firms.”

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FundForum NextGen Distribution Communication or Obfuscation?

The uses of data, large and small, not only encompass what is needed for the firm for reasons of strategic analysis, day to day operations and reporting. The data also should inform sales and marketing in clear and compelling way. One focal point is the corporate website. Often designed and driven by the marketing team (and its subcontractors), the corporate website may be the point of first contact with potential clients.

And yet, is the information there arranged in an attractive and useful manner? If a prospect chooses to supply his or her email address, what kind of materials will they receive? Is it relevant and the best use of such resources? “We bombard clients and prospects with far too much stuff that they don’t want and can’t use,” said one panelist, “And we can even see who has opened it, but we don’t always change our ways.” It is amazing in the process of targeting how unrefined it is, even today.

There are simply not that many studies or that much reflection on who is trying to get in front of whom and what kind of messages they are trying to convey?

Going Robo and Customer Education These days, studies show that more sophisticated investors are online as opposed to going through an advisor. Although robo or digital advising is quite likely to grow, the advisory role is not going away any time soon. For one thing, there remain some tangible and intangible benefits to the human aspect of the client relationship, particularly in times of market stress or unusual events. In addition, as intelligent as they are becoming, machines still tend to excel at the repetitive tech aspects of work in financial services. The nuances, empathy and “touch” aspects of the work are still properly in the human domain.

Sales Force Dynamics with New Technology Where salesforce CRM is concerned, there is a problem of “Garbage In, Garbage Out.” As driven as they are by calls and meetings, salespeople are typically not enthralled by the challenge of getting the right data into the right place. Since they are heavily focused on relationships, the

Even so-called sophisticated institutional investors often have no idea what they are buying, observed one panelist. This is evidenced by the number of lawsuits currently winding their way through the system, pushed by local cities, fireman’s pension funds and the like. The advisory process might be fine if salespeople had perfect ethics or truly understood what they are selling, but sadly, this is not always the case.

CRM system may be viewed as a glorified address book, though clearly it can be much more than that.

In order to help pave the way for smooth adoption, a fair amount of internal legwork may be required.

Getting the salesforce to be receptive to change can be a huge hurdle, so it is important to get managers on board first, then gradually seek out internal buy in.

Eventually the adoption may take on a life of its own.

It is critically important that the system works efficiently. One panelists noted the short attention span factor: a salesperson may have the patience to try the new process one time – if it works, it will seep into their consciousness quickly, and everyone will be happier. But if it does not, they will quickly go back to the old way of doing things. We have to take an extremely functional and practical approach; sales is not into learning for sake of learning; tools have to work for them, not the other way around, noted one panelist.

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To that point, one recent study showed that 67% of investment advisors would like to spend more time with their clients and prospects. The data suggested that if they were able to increase their consultative/ facetime by about half, then they could make three times the revenues, on average. Spending time on the human side is precisely about how to create value.

Thus there are so many opportunities for deeper, richer, client engagement where the goal is to educate and share information for the betterment of both sides.

And data is part of that equation, but it is still a work in process. As an industry, we want to be working with big data, but right now, we only have small data, said one panelist. However, like the nature of the investment advisory business itself, this is one facet that is sure to evolve over time.

FundForum NextGen Distribution

BACK TO THE SOURCE: WHAT IS DRIVING THE DIGITIZATION OF FUND DISTRIBUTION PLATFORMS? ARTICLE SPONSORED BY:

Jean Devambez, Global Head of Products and Client Solutions, Securities Services at BNP Paribas looks at three inextricable forces that are disrupting the evolution of platforms as we know them today..

Online platforms are digitizing the fund distribution industry on a global scale. Digital transformation is gathering momentum with the help of three major disruptive forces: investor demands, technologies and new regulation.

Compared with traditional distribution channels, online fund distributors not only hold a clear cost advantage, but also offer investors a more simplified and transparent investment experience.

A demand for all things digital A growing demand for digital solutions from investors is the primary driver behind this trend.

New generations of investors, including Gen X and Y investors, along with digitally-influenced baby boomers, are tech-savvy and seek control of their investments via a seamless, unified digital service at a relatively low cost. They want more engagement in the investment process and appreciate decision-making tools, charting tools and education resources. Another distinct feature of these investors is their belief in the wisdom of their peers. In addition to experts and financial advisors, they value opinions and views from multiple, less-conventional sources such as friends, colleagues or others investors.

New technologies... to help better understand the customer The second disruptive factor in fund distribution is, quite simply, the constant rise of new digital technologies. To cater to evolving investor needs,

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FundForum NextGen Distribution manufacturers and distributors adopt data-driven approaches to deliver the right product and stay competitive. For manufacturers, predictive analytics and big data enable them to translate large volumes of historical transaction data into valuable insights that, in turn, drive product development.

Typically, asset managers with predictive analytics do better than non-adopters across several customerrelated sectors, such as competitor monitoring, advisor profiling and sales optimization. Fidelity Investments, with its ‘WealthScape’ data platform powering advanced analytics empowering deeper conversations with clients and potentially driving better planning outcomes, is a good example of this evolution. Given the high cost of customer acquisition, US asset managers are also adopting new strategies within the roboadvisor business model, revamping them from D2C to B2B, as seen in the first quarter in the US with Blackrock or Invesco.

On the distribution side, content-rich websites, social media and mobile apps/Bots have become critical channels to reach and onboard the mass market investors. Compared with traditional distribution channels, online fund distributors not only hold a clear cost advantage, but also offer investors a more simplified and transparent investment experience.

Like the RDR in the UK, the new inducement rules under MiFID II will shake the fund industry in Europe: both manufacturers and distributors must redesign their pricing models. In addition, the transparency of advisory cost will enable much greater investor scrutiny of fees, thus further encouraging the use of the low-cost solutions (ETF, funds of funds) that allow manufacturers and distributors to achieve economies of scale. Lastly, unbundled pricing may drive the multiplication of ‘norebate share classes’, a type of commission-free share asset class already popular in UK. The last two years have also seen an increasing number of regulators accelerating their regulatory frameworks to catalyze fintech development. It remains a real challenge to strike a balance between developing innovation and safeguarding investor protection. As distribution continues to shift onto a virtual interface, fund manufactures and distributors need to leverage ‘nextgen’ platform strategies to remain visible, competitive and prepared for upcoming regulatory changes.

Regulation, another game changer Regulation is another game-changer in the fund distribution industry. The upcoming MiFID II will introduce a series of new requirements covering key topics such as investor protection, product governance and investment advice. The inducement ban and the increased transparency of costs and charges are both topics that are expected to have the largest impact on manufacturers and distributors.

ARTICLE BY:

JEAN DEVAMBEZ, GLOBAL HEAD OF PRODUCTS AND CLIENT SOLUTIONS, SECURITIES SERVICES, BNP PARIBAS

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LEADING YOUR ORGANISATION TO DELIVER GROWTH THROUGH INNOVATION IN THE ERA OF FINTECH

AS THE CHINESE PHILOSOPHER LAO TZU ONCE SAID, “IF YOU DO NOT CHANGE DIRECTION, YOU MAY END UP WHERE YOU ARE HEADING.

Amy Radin has been working at the intersection of finance, technology and innovation for much of her career. Among other roles, she was Citi’s first Chief Innovation Officer, and later became Chief Marketing Officer at AXA, where she guided digital transformation. In this talk, she focused on conveying an active and engaged operational perspective, answering the question, “What do executives, innovators, and employees need to do to bring about positive change in their organizations?”

She noted that it is hard to express negative feelings about innovation, but when it comes to taking actions that may be disruptive to existing products, services or processes that are working reasonably well already, it can become extremely difficult. Although we are all interested in continuous improvement, we also tend to resist extreme disruption.

Surveying the industry landscape, Radin observed that financial services, retail banking, payment systems and wealth management are facing a similar set of challenges and opportunities. These days, they are in the midst of a perfect storm, as they grapple with the impact of regulation, while also confronting the changing nature of the advisory relationship and consumer expectations. There are substantial pressures on the conventional business models and there is no clear flight path to a stable mode of operation that we can abide by in the current economic, financial and technological environment.

On the positive side, there has been intense investment around fintech this decade. Some of the world’s largest and most influential venture capital firms and asset managers have made bold forays into the field, developing large portfolios of related companies. There has been a fair amount of hype in the fintech space as well, perhaps a dampening feature for those who have lived through the Crash on ’87, the dot com bubble and the global financial crisis.

Clearly, when it comes to early stage start-ups, we should not lose sight of the fact that most of them will fail. Nevertheless, there is considerable energy around innovation labs and incubators at the moment – such activities are a way to get in the game, learn how it works and develop plans for the longer-term. For firms embarking on the journey, Radin offered the following definition: “Innovation is any type of differentiation in your business that drives preference.” She added

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FundForum NextGen Distribution that this does not mean preferences the way we might think of them from the inside; this is rooted in the point of view of constituents outside the firm – the clients, suppliers and external innovators who have capacity to push the levers and influence the profitability and overall success of the enterprise. When we think about innovation in this way, it becomes an approach that stimulates real impact on the P&L, she said.

As important as it can be, innovation is plagued by hype and misperceptions; Radin offered detailed observations on the flaws in thinking about what innovation is and its impact on the firm.

Misperceptions about Innovation First and foremost, is the romantic vision of innovation: we tend to equate innovation with moonshots. However, much of the value lies in incremental, not radical, change. Incremental changes drive over 90% of the value in most industries.

However, it can be difficult to tell whether something will be incremental or disruptive technology. Further, it is challenging to have deep insights into what will succeed and what will fail over the long term and why.

This blindness leads to the next observation.

INNOVATION IS ANY TYPE OF DIFFERENTIATION IN YOUR BUSINESS THAT DRIVES PREFERENCE. We don’t connect innovation to measurable results in an appropriate way. All too often, new ideas are forced through the filter of a traditional P&L and this is one of the most effective ways to kill innovation. Those truly interested in change must be willing to operate with a different kind of precision. Innovators are always looking at questions around the market – where and what is it, how should the firm reach out to potential customers and what are their spending behaviors like? If the firm could capture 1 % of the market, then how would that look and where would growth come from after that?

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Too often, promising ideas are saddled with preconceptions and traditional metrics early. Radin encouraged taking a diversified portfolio approach instead, where the questions center on attaining sufficient numbers to keep going and then address the timing of the expected payoff, as well as the size and likelihood of that payoff. This highlights why people are building out incubators and partnering in joint ventures; a wise strategy is to take on various positions in market, managing the risks and rewards over time.

We tend to gravitate towards product innovation, but innovation can take many forms (see the Ten Types of Innovation website for elaboration on that). We also tend to prefer practicality, stability, and control in our effort to manage risk, but innovation requires a different way of thinking. Radin provided details on four mind set shifts that will help innovators conceptualize their goals and embark on the path towards having a positive impact on customers, the market and the firm’s bottom line.

As the Chinese philosopher Lao Tzu once said, “If you do not change direction, you may end up where you are heading.”

Radin points out that, indeed, irrespective of the choices we will make, the future will happen. However, innovation can be managed in a way that allows new ideas to flourish. It requires some old-fashioned leadership, vision and persistence. In the end, it’s not about a single innovative moment, it’s about wisdom and the sustained commitment of leadership.

FundForum NextGen Distribution

REGULATION: THE NEXT BIG DISRUPTOR?

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MAKING COMPLIANCE WORK FOR YOU IN AN ERA OF CHANGE NEERAV TRIVEDI, Director, KPMG MATTHEW CHAMBERS, General Counsel and Chief Compliance Officer, Horizon Investments SHELLEY SIMMS, Senior Vice President, General Counsel and Chief Compliance Officer, FIS Group RONAN BRENNAN, CTO, Accudelta

In this discussion, the panelists examined industry activities and current concerns around compliance.

The group looked at platforms, performance reporting, and data collection, with an emphasis on best practices in data management and reporting processes.

It is now possible to query AUM at any time and this is a seismic change in the industry.

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Managing the Small Managers Starting with a look at the scale of firms and their abilities under the new regime, Shelley Simms of the FIS Group noted that when it comes to allocating funds to small management firms, the larger clients would not tend to go direct. With the increased level of due diligence and reporting requirements, it is simply too much work, so there has been a boom in outsourcing to other firms, such as Simms’ FIS Group, for such allocations. These hubs can handle the reporting needs and provide the requisite data for activities related to transparency and compliance. They are able to aggregate the data and provide it in a uniform, overlay format, rolled up for the large clients.

On the backend, they are able to advise and remind the small management firms about regular reporting deadlines and events that require disclosure or additional notification, such as key man provisions

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(e.g. a PM has left the firm). She advised that smaller managers are not always aware of every nuance in reporting and may lack sufficient sophistication with IT systems to do the tasks in a timely and correct manner. Thus intermediary firms like hers ensure adherence to a compliance reporting calendar, push a high level of data quality and provide a clear view into the custodian. They create a system of checks and balances, which includes reconciling performance figures with precise recalculations.

Data Streams and Reporting Formats Moving to the subject of performance, Matthew Chambers of Horizon Investments commented on several aspects of reporting. In years past, there were questions about what assets were needed to report, now the models delegate the process largely to technology, with tools such as Folio, Investnet and Adhesion supporting the reporting process. A second major change is the ability to report on assets in a real-time or live basis. It is now possible to query AUM at any time and this is a seismic change in the industry. In spite of such developments, there are still issues with data streams, from the conventional forms of financial analysis to the design of performance sheets and related reporting formats. Although the technology is powerful, it is still a long and sometimes painful process to take live feeds from the sheets and create customized reporting products.

Data Management in a Brave New World Looking at the current regime of regulatory requirements, Ronan Brennan of Accudelta explained that his firm is a niche service provide to asset managers and they help to generate public-facing data, distribution data and regulatory reporting. With careful thought and structure, it is possible to manage the data flows to meet multiple needs and not reinvent the wheel for each mode of communication. However, this does require a sophisticated and tactical approach to data management and the underlying structures in databases and networks.

Whether they are generating retail fact sheets for posting on the corporate website, or filling in forms for government agencies, the relevant data streams are emanating from all areas of the investment firm.

Essential questions he asks at the outset of each project include: Where is the data coming from? Where is it going? And What is it, exactly? Brennan cited the example of Form PF and noted that they built a data

lake and were able to feed the form from that collection of data. This approach brings economies of scale to the management and reporting endeavors.

Turning to some of the points that Shelley had made about her firm, Brennan agreed that it is a substantial challenge to collect data from numerous subadvisors.

The reporting will inevitably be in different formats and requires cleaning and reconciliation. In Europe there have been significant issues with standardization and he emphasized that we have to become better at sharing data as an industry. However, he also pointed to pioneering forms of collaboration and the fact that new products are being launched all the time to meet the evolving needs of the financial sector.

With careful thought and structure, it is possible to manage the data flows to meet multiple needs and not reinvent the wheel for each mode of communication.

In the final analysis, the panelists agreed the beyond meeting the needs of regulators, sales teams, and marketing departments within firms, it is critically important to get involved with the public discussion. Each firm can help shape the landscape and engage in the important activity of educating the public and furthering the insights of the industry participants themselves.

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IS REGULATION THE NEXT BIG DISRUPTOR? ARTICLE SPONSORED BY:

A more strategic approach is required; one that looks to the long-term and seeks to embrace and invest in technology and processes that will allow a firm to respond effectively to a myriad of regulatory reporting requirements.

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Is regulation the next big disruptor? No - it is already the current big disruptor. I would argue that regulation is the biggest disruptor ever encountered by the asset management industry, even more disruptive than the evolution of the internet, and is likely to remain so under the current regulatory regime as promulgated by the Financial Stability Board. The last disruptor which had this level of impact on our industry was the emergence of the personal computer.

Don’t get me wrong; regulation is good. The financial crisis of 2008 showed us that regulation is absolutely required. However, like a prescription from a doctor, it is about ensuring that regulation is fit for purpose, delivered in the right dose and at the right frequency.

More than ever, the latest wave of potentially very innovative and disruptive regtech and fintech firms to enter our industry have shown there is certainly not a lack of willingness to embrace change. Unfortunately, these innovative disruptors are being stymied by the presence of have-to-do regulation and compliance which is consuming vast swathes of each firm’s available budget, thus preventing them from putting more than a tentative toe in the water..

Responding to regulation can be expensive. It would not be unreasonable to suggest that compliance spend should be one of the top three costs for a firm in any given year, but when we have a situation where it is the number one cost for five, six, seven years running, that should raise alarm bells. It pushes regulation to being disruptive to the point that the impact of other innovative dimensions is being severely dampened.

Regulators are aware of the costs. Many of the regulatory consultation papers garner feedback on the cost of

FundForum NextGen Distribution implementation to understand better the implicative costs for each proposal and allow for tuning of the costbenefit ratio. The regulator has, and must have systemic market stability and best interests of the investment community as their first port of concern – but they also have the challenge of balancing that approach with keeping the industry on a sustainable footing.

Why is responding to regulation so costly for asset management firms? Each new regulation brings with it the need for vast amounts of data and technology that will help respond to that regulation. Many firms attempt to respond to each regulation in isolation, as and when they are faced with them. This drives inefficiency and pushes up the costs. A more strategic approach is required; one that looks to the long-term and seeks to embrace and invest in technology and processes that will allow a firm to respond effectively to a myriad of regulatory reporting requirements.

We can already see in the industry firms that have taken this step of long-term planning and, as a result, seem to be carrying the burden of regulation more comfortably than some of their peers. When taking a closer look at the approaches these firms have taken, some common patterns begin to emerge: • Data is the core foundation for everything they do and is valued as a resource that demands care, attention and enrichment • Governance and stewardship of data are the cornerstones of their operating models, from bottom to top • However, more importantly, these firms have focused on strategically investing in their data management ecosystems, establishing a common, unified source of data which serves the full suite of regulatory reports. The key is establishing a framework that will be fit for purpose not only today but also tomorrow. These firms have a tiered approach to their regulatory data repositories with strong support for regulatory data lakes and supporting central hubs for final mile reporting.

This method ensures that the underlying data needs to be serviced once and only once. On top of this core lie the people; these firms have established teams that are not looking towards the end of the year, but the end of the decade.

transparency on the simple transaction. TCA vendors spotted the same trend, and they evolved at a rapid pace to fill the innovation void in many firms. At the same time, there were firms that spotted this inflection point and had actively developed lakes for their transaction data where they attempted to capture all of the data being asked for today, as well as trying to foresee (never easy!) the data needed tomorrow. These firms when the presented with challenges around CPOPQR, EMIR or MiFID II were able to adapt and respond in a far more agile way than many of their peers.

The challenge is that strategic investment required to respond to regulation is a multiple of the tactical investment, and the tactical investment is by no means inexpensive. However, the reality is that firms need to embrace a far more strategic approach, or face drowning in the constant wave of regulation, never able to keep their head above water.

ARTICLE BY:

RONAN BRENNAN, CTO, ACCUDELTA

To use an example – let us consider the drive for transparency around transactions – many firms who were looking forward could see that many different regulatory pressures were attempting to expose more

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THE DOL FIDUCIARY RULE: ADJUSTING OPERATIONS AND PROCEDURES TO COMPLY

If we don’t want to look like Bangladesh we must take better care with pension planning now, before a real disaster arrives.

MODERATOR: LOREN FOX, Director of Research, Ignites Research MIKE BEER, President and CEO, Principal Funds, Principal TAMAR FRANKEL, Professor of Law, School of Law, Boston University JIM PATRICK, Member, Board of Directors, The Institute for the Fiduciary Standard and Managing Director, Envestnet CRAIG PHILLIPS, Head of International, CoreData Research CHRISTINE GILL, Managing Director, BNY Mellon In the wake of Dodd-Frank, there has been an avalanche of discussion, debate, and new rule making designed to bring the financial services industry into better alignment with stakeholder preferences and improved risk management practices. Part of the effort has been centered on redefining and emphasizing the nature of fiduciary responsibility.

In recent years, the Department of Labor in the United States has joined the conversation, issuing a set of rules governing the relationships between firms, advisors, and both their institutional and retail clients. Specifically, on April 6, 2016, the U.S. Department of Labor (DOL) issued its final rule expanding the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). The rule will make adjustments to the prohibited transaction exemptions for investment activities with regard to the newly expanded definition. The final rule also includes provisions of the previous round of proposed rules (April 2015), including: Significantly expanding the circumstances in which broker-dealers, investment advisers, insurance agents, plan consultants and other intermediaries are treated as fiduciaries to ERISA plans and individual retirement accounts (IRAs), and are therefore precluded from receiving compensation that varies with the investment choices made or from recommending proprietary investment products absent an exemption; • Providing new exemptions, and modifying or revoking a number of existing exemptions, addressing those activities; and • Retaining the ERISA distinction between nonfiduciary “investment education” and fiduciary “investment advice.”

The final rule also reflects changes based on the extensive public commentary that has been received by the DOL regarding the proposal rules.”

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In launching their discussion, the panel noted that with these developments, the DOL rule is playing a similar role in guiding investment advisors that Dodd-Frank is in guiding banks. The advice to the industry is to embrace the changes and to see them not as a burden, but as an opportunity. Compliance will take a significant amount of effort and early movers will gain competitive advantage; the rules also create a barrier to entry for those not yet operating in the financial sector.

Turning to the provisions of the DOL rule itself, the panel began with the core principle of fiduciary duty and its application via the rule: the DOL rule would be the standard for all retirement accounts, including individual accounts. Clients seeking specific advice are owed not only suitable and informed opinions, but also prudence and care. A new focus is placed on their best interest and also on a deeper examination of conflicts of interest and self-dealing by investment firms.

The most pressing needs for careful governance in the realm of retirement planning and investment are driven by the fact that millions of people will be retiring in the coming decades and many of them have very little understanding of investments or the pension fund structures underlying their retirement savings accounts.

This means that there is a highly dependent and vulnerable population of investors who need the greatest level of support as they reach retirement age and enter the twilight years of life. “If we don’t want to look like Bangladesh,” said one panelist, “we must take better care with pension planning now, before a real disaster arrives.”

There is a history to the advent of the DOL rule; fourteen years ago, it was suggested that under certain circumstances people who manage and advise on financial concerns of any nature are fiduciaries and the arrangement is not contractual, since the other party cannot take care of itself. This is true to a greater or lesser extent across the various categories of investors and levels of wealth they possess, but by redefining the relationship as non-contractual introduces a the need for a higher standard of care.

Stemming from that earlier discussion, the SEC was required to study and create a uniform rule for financial professionals who give advice – namely brokers, financial planners and advisers. The mandate was pushed out six years ago and yet very little was done, at least initially. The SEC requirement looks at brokers who give advice and are not simply executing transactions.

In this case, the advice is subject to the fiduciary duty, but there are some gray areas that add to the complexity, particular regarding incentives and payment structures. Since both the DOL and SEC are making rules in this domain, there is opportunity for divergence and disharmony between the regimes.

Since both the DOL and SEC are making rules in this domain, there is opportunity for divergence and disharmony between the regimes.

The ideal, one panelist noted, is certainly not to expose people to conflicting rules governing the nature of these relationships and guiding the conduct that is expected of the industry. The thinking at this time is that if the DOL rule stands, then the SEC will establish rules as close as possible to that rule, so they will not be creating two systems to handle the same set of issues. In short, the panel concluded that the fiduciary rules in general are not necessarily creating new trends, but they are accelerating trends that have been underway since the global financial crisis. Though the process may be confusing right now and compliance measures may be painful to implement in the short term, the financial services industry and the populations it serves will adapt and survive.

PLAY VIDEO

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WILL THE CUSTOMER OF TOMORROW CHANGE THE FUTURE OF DISTRIBUTION?

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WHAT DOES THE FUTURE OF CUSTOMER COMMUNICATION AND ENGAGEMENT LOOK LIKE? MODERATOR: APRIL RUDIN, CEO, The Rudin Group BRIAN BYRNE, President, Aviador & Associates BENJAMIN GROSS, CEO and Founder, Visualize Wealth KENDRICK WAKEMAN, CEO, FinMason BRAD SHERMAN, President, Sherman Wealth Management In this panel discussion, participants addressed the questions of how financial services are perceived by customers, how they should approach new technological capabilities, and how they may seek to transform the various facets of banking and investment into one seamless portal.

According to recent statistics published by the Pew Foundation on Millennials, 71% of people in this age category would rather go to the dentist than meet with an investment advisor. If this so-called Disruption Index figure is correct, it is certainly not good news for the financial services industry, so what can we do to make the advisory experience more pleasant? One of the goals would be to create a seamless, informative, customized and agile experience.

When examining what the younger generation wants in a professional relationship, we find that although they seek to differentiate themselves from the older generations, in fact, when they are faced with serious situations, their needs mirror those of their parents.

They eschew distant advice for the same close and personalized advisory experience. As one panelist put it, “What if I had a windfall – winning millions in the lottery, or what if I am thinking about my old age and retirement concerns? Millennials are quite comfortable with UIs (User Interfaces), but when it comes to deeper psychological needs and emotional decision-making, what Kahneman and Tversky have been saying holds true.”

Beyond Basic Transactions When we consider robo advisors in that light, we find that many clients are interested in deeper engagements with experts that entail learning, beyond the completion of basic transactions. Beginning with Generation X, however, it is important to focus on shaping conversations and even the surrounding atmosphere of the financial advisor’s office away from old Wall Street stereotypes (think of the heavy mahogany tables and leather chairs of the traditional advisors office) towards more collaborative and fresher models of engagement. These will entail intelligent and strategic use of data and technological capabilities. In a blended approach, advisors may lean on robo services for some tasks, while keeping a distinctly personalized touch for others. In addition, technology offers the ability to interact at a distance; using Skype, Facetime, or other video conferencing tools, they can now have face to face contact wherever they may be. This is a step towards a higher level emotional engagement that could extend to an array of concierge-like offerings, from a daily investment commentary to solicitation of feedback on various financial needs or questions, leading to a powerful customer experience.

In a blended approach, advisors may lean on robo services for some tasks, while keeping a distinctly personalized touch for others.

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FundForum NextGen Distribution As an interesting counterpoint, one panelist observed that there is fairly pervasive shame in certain quadrants of their customer base; people feel guilty about making poor financial decisions (or their failure to make any decisions at all). This is an opportunity to address a significant emotional and educational issue – how to make people feel better about themselves, to reinforce the ability to make informed financial decisions, and to emphasize the importance of timely corrective behavior for the possible mistakes of the past.

It’s About the Brand (or Maybe Not) According to a recent Cap Gemini World Wealth Report – traditionally, many people, particularly those from the Boomer generation, have wanted to align themselves with corporate brands. However, young professionals are actually turned off by the bigger brands. They are skeptical about firms that are too large and emphasize that they want to be given clear, conflict-free advice.

As the industry examines and attempts to ameliorate some of the past excesses and abuses of the advisory relationship, this quest will evolve, spurred along by the advent of the DOL guidelines and other things that are on the horizon.

We are at the beginning of a sea change in how investment advice is delivered and the impending wave of wealth transfer from parents to children will accelerate the shift to new modes of interaction. How will products and services be offered on the platforms of the future?

There may be consolidation and interconnection between banking and investment platforms. One key issue is login fatigue and fragmentation; people may need to talk to a wealth manager, make a checking deposit, and take out a loan all in the same day; why should they have to access multiple technology platforms to complete this suite of activities? A virtual aggregator could serve as a one-stop curator, which covers credit, asset management, retirement, investment, payments, and related information and services under one rubric. A single location dashboard would help customers control their entire financial life from one centralized point of contact.

Communications and Social Media In closing the discussion, the group evaluated the use of communications channels, including social media, to raise awareness and create lasting, information-rich connections to the clients. Echoing the comments made previously, the panelists urged investment advisors to maintain a high standard on financial education; people who hire advisors in the first place are implicitly seeking

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to develop some expertise themselves. As one panelist put it, a basic investment policy statement may not do that much for me, but informing me about various asset classes, limited partnerships, alternative investments, or precious metals will stimulate my ability to learn something new. When this type of sharing takes place, it will make me want to engage and reengage again and again.

In the aftermath of the financial crisis, there has been a substantial loss of trust between retail consumers and the financial services industry. How people engage, retain, and quantify the value they have received from investment professionals is going through a tremendous change. People are particular about how they want content distributed to them and they are both skeptical and confused about big brands that relentlessly push the corporate agenda, but do not necessarily support the agendas of their clients Content marketing and social selling help enhance the roles and processes through which the industry can offer a full array of services, from credit cards and universal banking to discount brokerage and full-fledged asset management and advisory relationships. The trends are readily apparent from the dynamics of the market: independent financial advisors have been the only segment of financial services to contribute to growth since 2009.

With so many people seeking advice, technology will help address the demand, particularly at the lower levels for those with little to invest or those approaching financial planning for the first time. As advisors deploy CRM tools to capture and enhance the conversations, they can gain insight on levels of financial literacy, attitudes towards wealth management, and even aspects of behavioral finance. It is essential to educate the customer and shape the dialogue around needs and desires; a mixture of technology and touch will bring the best outcomes for both sides of the table.

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THE CHANGE HORIZON: THRIVING AMID DISRUPTION IN THE VALUE CHAIN As the world of investing continues to evolve, numerous forces both inside and outside of finance are now shaping the landscape dramatically. The choices made now will influence the further growth of the fund world in the decades to come. In this talk, Shundrawn Thomas, Executive Vice President and Head of Funds and the Managed Accounts Group at Northern Trust Asset Management offered seven insights in the state of the investor and the industry today. Thomas began with an overview of the key themes in wealth management.

THE RISING TIDE OF REGULATION IN FUND MANAGEMENT DEMANDS PROACTIVE AND INNOVATIVE CHANGE TO BE EXERTED ON EXISTING BUSINESS AND DISTRIBUTION MODELS. 22

The Three Gs: Generational, Geographical and Group First, in surveying the investment world today, we find the generational issue: in the next few decades very substantial amounts of wealth will be passed on to generations that have much different capabilities with technology and data, on one hand, while having much greater expectations of what an advisory relationship could or should be on the other. This does pave the way to robo-advisors, but those are not the only solution for Gen Y and the Millennials.

Second, we find geographical dispersion in wealth; far wider than it has ever been before. The rise of the middle class in parts of the third world creates new opportunities for investment managers. Cultures too, vary widely, and between geography and the existence and formation of groups, there is no easy one-sizefits-all solution to the questions of client education, expectations management and asset allocation for the long term.

The key takeaway, concludes Thomas, is that demographic shifts are changing the composition of investment decision-makers requiring new distribution strategies and models.

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The Retirement Savings Gap Turning to one of the core issues facing the most developed nations, Thomas observes that there is, indeed, a retirement saving gap. Simply put, over the years, investors have set aside too little to fund their retirement goals, resulting in rising demand for investment advice and solutions.

Regulatory Responsiveness Regulatory activity tends to focus on four key areas with varying degrees of scrutiny and effectiveness: consumer protection, conflicts of Interest, complexity and cybersecurity. There will always be bad actors, says Thomas, and taking on consumer protection creates an affirmative role and mindset for regulators. Thomas worked to dispel the notion that the rapid growth of self-directed investment in the last decades and digital advisors more recently necessarily means that the days for active and discretionary fund management are drawing to a close. On the contrary, in fact; Thomas sees that in a world of too many choices, people will rely on skilled professionals more than ever. This is particularly true with respect to the genuine threats inherent in complexity and cybersecurity. Thomas’s point is that the rising tide of regulation in fund management demands proactive and innovative change to be exerted on existing business and distribution models.

Problems Need Solutions Giving advice is a risky business in and of itself, add to this a mandate for accountability, transparency, fairness, and rightful or wrongfully taking complexity into account. People are wary of the sales pitch these days (in some industry segments, consumer confidence has never been lower). Within this skeptical, complicated and occasionally hostile environment investment advisors must shift from the traditional format of offering advice and selling products to delivering outcome-oriented solutions.

ETFs at the Center Since their inception, ETFs have been a highly disruptive force in the investment world. Clearly they offer advantages on the cost front, as well as simplicity, tradability and access to far greater asset choices than was the case in previous eras. Investor preferences for transparency, efficiency and accessibility will accelerate even broader acceptance of ETFs and will continue to alter portfolio construction theories and methodologies in the years to come.

Man Plus Machine Taking a look at intelligence, Thomas asserted that this story is about a natural arc in history – adaptability is a trait that stands the test of time quite well. While some people fear that machines will take over the world, leaving humans with nothing to do, history is showing that machines actually are best suited for taking on tasks that do not require a layer of judgement – they bring about greater efficiencies and stimulate opportunities for new jobs and new tasks to be created and managed by humans. Taken together, man and machine can be a very powerful combination and the integration of human and artificial intelligence will better enable business development, portfolio optimization and client engagement.

Rebirth of Retail Finally we arrive at a new vision for the investment industry. Having studied disruptive technologies and the history of the financial sector extensively, Thomas believes that the will be a renaissance in the field of retail investing. There are over $250 trillion in assets out there, he says, and the vast majority of that wealth is owned by individuals, with perhaps $5 trillion belonging to governments. It is important to remember that we are all serving as trustees or advisors working in behalf of these people. How well do we know the customer of today, let alone the customer of tomorrow? The answer is not completely clear, but Thomas predicts that major demographic shifts, rapid technological adoption and business model innovation will fuel a renewed focus on direct distribution efforts.

A) be an effective solution for this problem?

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