Financials

Distribution Of Investment Products In Europe – Shortfalls And Opportunities

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<p style="text-align: justify;">In general, I consider the Distribution of Investment Products as one of the most important issues in the world of Global Finance today. On one hand, it substantially affects individuals' and institutions' present and future well-being. On the other hand, it can generate significant new business for all companies eligible to develop and/or distribute such products.&nbsp;</p><p style="text-align: justify;">These few lines below aim to demonstrate some practical and implementable ways to make Investment Products work better for the interest of Investors and Investment Companies.</p><p style="text-align: justify;">Just by observing the total amount of EU deposits in the middle of 2022 of more than 15 trillion USD &ndash; a record high for the last 20 years, one can immediately realize the huge business opportunity that can be generated by proper Investment Consultancy and overall attention to effective Distribution of Investment products.&nbsp;</p><p style="text-align: justify;">And although the total amount of Assets Under Management (AUM) has more than doubled during the last decade from 14 trillion USD to 30 trillion USD, the total amount of idle unutilized deposits is still overwhelming.&nbsp;</p><p style="text-align: justify;">This untapped opportunity is also demonstrated by the simple fact that 70% of AUM in Europe is concentrated in just 4 European countries, and more than 1/3 of AUM is produced in just one country, the UK.</p><p style="text-align: justify;">There are two reasons for this picture:</p><p style="text-align: justify;">Individuals or Institutions are reserved, reluctant or afraid to acquire full-blown capital management proposals by specialists and become active investors through discretionary fund management accounts, platforms or any other way and&nbsp;</p><p style="text-align: justify;">The Institutions (Asset Management Companies, Banks, AIFMs, Mutual Fund Companies etc.) eligible to offer such products and services have not built the necessary distribution capacity and know-how to make potential investors trust them and actively engage them to capture this opportunity lying in front of them entirely.&nbsp;</p><p style="text-align: justify;">But why does this happen, and how can it be fixed?</p><p style="text-align: justify;">There are various steps that Investment Solutions Providers can take, at least in Europe:</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Investment Distribution Solutions</span></h2><p style="text-align: justify;">Potential investors need to be much more educated through ongoing programs on various instruments they can utilize.&nbsp;</p><p>What does each instrument category mean? What purpose does it serve? What are the risks and advantages it entails?&nbsp;</p><p>For example: Although Derivatives are generally considered risky instruments, through the leverage they provide, capital can be released, which can be used as the basis to design and offer Capital Protection products &ndash; a significant product mainly targeting the more risk-averse investors.</p><p>Investment consultants, regardless of their status and form (tied agents, employees, IFAs etc.), should be much more in number through modern recruitment, selection and development programs and schemes, as well as much better trained through continuous training programs and updates. Half-knowledge is usually more dangerous than ignorance.</p><p>Proper sales culture has to be developed as a strategic priority, backed by appropriate incentive schemes, strong tools, and effective sales management.</p><p>Marketing campaigns should be designed and executed regularly, based on detailed profiling of potential investors, and with the main focus on the thorough vertical utilization of each customer, in terms of the number and type of products bought and income generated per customer.</p><p>Marketing messages should be as simple and less technical as possible, focused on the end impact to the investor (risk and return) and providing the logic of the underlying mechanism.&nbsp;</p><p>Regulators and Institutions have put enormous attention, especially during the last years, to regulatory compliance, risk mitigation, transparency, quality of services provided, full disclosure of information for conscious purchases, client protection, data integrity etc.</p><p>Have we put, I wonder, the same attention to business generation and engagement of the potential investors? Have we done everything needed to bring the average investor (Institution or Individual) closer to this treasure of instruments which can open a new world of opportunity and prosperity if utilized with knowledge, logic and good judgement?</p><p>&nbsp;</p><p><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/george-tsakonas-business-development-director/">George Tsakonas</a></em></span></p><p>&nbsp;</p><h3><span style="font-size: 18pt;">Frequently Asked Questions Answered by George Tsakona</span></h3><h2><span style="font-size: 12pt;">1.&nbsp;What are the channels involved in the distribution of financial services?</span></h2><p>Financial Services is a very broad term. If, in the context of my article, by Financial Services, we mean Investment Products in Europe, then there are two main types of offers. The active and the passive:</p><ul><li style="list-style-type: none;"><ul><li>Active is when a certified Investment Advisor actively engages in discussion with a potential investor, through which:<br />He (the advisor) analyses the investor's investment preferences, risk profile and propensity to risk, investment horizon etc. and&nbsp;<br />Presents the various options with their pros and cons and reaches an agreement with the investor on the general direction and form the investor wants his investment to take.&nbsp;</li></ul></li></ul><p style="padding-left: 40px;">Then, a specific product or product package is presented to the investor and prepared by an Asset Management Company for placement of the investor's capital, following a strict process determined by law regarding KYC, AML etc.&nbsp;</p><p style="padding-left: 40px;">This placement can be concluded on a fully discretionary basis, i.e., the Asset Management Company chooses the product package per its discretion, and the investor is obliged to accept it, or partially discretionary, where the investor has to approve the product.</p><ul><li style="list-style-type: none;"><ul><li>Passive is when the investor takes the initiative and purchases a specific product or product per his preferences without any consultation by a professional. The transaction can be performed either as an investment order given to the Asset Management Company or through a specialized platform to which the investor subscribes.</li></ul></li></ul><p style="padding-left: 40px;">The institutions that can perform such service can be Asset Management Companies, Banks and other licensed Credit Institutions, Mutual Fund Companies, or Alternative Investment Fund Companies (AIFMs), including Hedge Funds, Private Equity or Real Estate funds.&nbsp;<br />Advisors can be employees, tied agents, Investment Brokers, and Independent Financial Advisors (defers by Country and market).</p><p>&nbsp;</p><h2><span style="font-size: 12pt;">2. Is ETF safer than stocks?</span></h2><p>It is essential before answering to define what "safer" means. Risk has different meanings for different people. As a general statement, we could say that risk depends heavily on the Investor's Investment Horizon and the degree of tolerance to price deviation. The longer the horizon and the smaller the deviation generally means less risk.</p><p>Traditionally stocks have a higher risk than Mutual Funds such as ETFs since the basket of stocks and other instruments ETFs increase diversification, which generally makes them an option more appropriate for risk-averse investors.&nbsp;</p><h2><span style="font-size: 12pt;">3. What is the safest investment right now?</span></h2><p>One should approach this question very cautiously. The current economic environment globally is, without doubt, very challenging:&nbsp;<br />Military conflict in Europe, Growth challenges in China, Inflation rebounding in the US as well as Europe and elsewhere after the COVID period leading to continuous base interest rate increases by Central Banks and fear of global recession together with an unprecedented energy crisis, create a very "negative" mix, not allowing to distinguish easily promising options.</p><p>Of course, again, it depends on the Investment Horizon one has. If it's more than ten years, for example, one could find many stocks or other instruments trading well below their fair price to open a position for the long term.</p><p>Another very interesting product consideration could be "Straddles". These are Option strategies (derivatives) betting on market volatility, which may be the only certain thing one could observe, at least at present.&nbsp;</p><h2><span style="font-size: 12pt;">4. What sectors are there in investment banking?</span></h2><p>Investment banking is a particular type of Banking with the primary objective to raise money for Companies, Governments or other entities in a variety of ways, including underwriting the issuance of new securities, organizing large, complex financial transactions such as mergers or initial public offerings (IPOs), or providing advice in mergers, acquisitions, and restructurings.</p><p>Unfortunately, this is not an area I have been dealing with during my career, and I have very little knowledge of it, so I cannot really provide any further useful information on this topic.</p><p>&nbsp;</p>
KR Expert - George Tsakonas