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Thursday, October 09, 2014|
For U.S. Fundsters, the View Across the Pond Looks Both Complex and Familiar
For U.S. fundsters interested in expanding their reach across the pond, distribution and regulation may begin to look both more familiar and more complex.
That was a picture painted this morning at the the Association of the Luxembourg Fund Industry's (ALFI's) roadshow at the Metropolitan in midtown Manhattan. ALFI chairman Marc Saluzzi brought out the big guns, including Pierre Gramegna, Minister of Finance for the country of Luxembourg, and gathered Luxembourg fund industry experts to speak to fundsters from both sides of the Atlantic.
The new Alternative Investment Fund Managers Directive (AIFMD), which is specifically about alternative investment products and those who manage them, was a big topic of conversation at the forum. But ALFI panelists also highlighted distribution and reporting issues in Europe that traditional mutual fund firms will soon feel the effects of.
On the distribution side, the coming changes may make the intermediary-sold mutual fund business in Europe look a lot more like that same channel here in the U.S. Michael Flynn, directeur of advisory and consulting for Deloitte in Luxembourg, told attendees that the Markets in Financial Instruments Directive 2 (MiFID 2) will shift European fund distribution to a split advisory model, one where distributors may chant the "fewer and deeper" mantra (of having fewer and deeper asset manager relationships) also being sung by broker-dealers in the U.S.
Flynn, speaking on the "product design and distribution" panel moderated by Rafael Aguilera of EY in Luxembourg, explained that MiFID 2 will require UCITS funds (the Undertakings for Collective Investment in Transferable Securities, the European equivalent of the Investment Company Act of 1940 for mutual funds) will require more frequent suitability disclosures from distributors, which translates into higher costs for distributors. And MiFID 2, Flynn said, will create a U.S.-liked bifurcated model for advice, divided between independent advice providers (like RIAs here) who receive no commissions or soft dollars and non-independent advice providers who must disclose their non-independence (and who cannot take discretion over client assets).
Flynn expects European investors to be more interested in cheaper share classes, once MiFID 2 takes effect across the EU in two years or so. That, combined with the increased disclosure costs, Flynn says, may mean that distributors like banks will shift away from open architecture.
"Distributors will look to keep their profit margins," agreed AllianceBernstein's Silvio Cruz, speaking on the same panel. "It's going to constrict the choices that they have on their platforms."
And for fundsters with particularly complex strategies, MiFID 2 means another change for European distribution. Under the original MiFID, all UCITS funds were "deemed non-complex," Flynn said, and non-complex products can be sold directly to investors without any investment advice, or suitability checks, involved. "Complex" investment products, though, need to be sold institutionally or through an intermediary offering advice.
"It's not for sure that every UCITS fund will be deemed non-complex," Flynn said, estimating that perhaps 10 to 15 percent of UCITS funds may face that designation, and the accompanying distribution restriction.
On a separate panel on "reporting and remuneration rules", moderated by Denise Voss of Franklin Templeton Investments in Luxembourg, panelists discussed the remuneration (i.e. compensations) policies and disclosures that the new AIFMD rule requires of alternative asset managers. Yet some very similar remuneration rules, warned panelist Jacques Elvinger of Hoss & Prussen in Luxembourg, are coming for traditional mutual fund firms, too, the UCITS V rules that take effect in 2016.
The thrust of the remuneration-related pieces in both AIFMD and UCITS V, Voss said, is "about aligning risk" taken by investors and the asset managers who serve those investors.
"It's a very political issue," Voss said, adding that is difficult for those regulated, like asset managers and banks, "to stand up and complain."
The rules, Elvinger explained, will require fund firms to identify the "risk takers" on their staffs, such as PMs, who are subject the rules and then make sure that a certain minimum portion of those staff members' compensation is in the firm of shares of the funds they manage. And the asset manager's compensation policy would have to be approved by the specific European country in question, such as Luxembourg. For U.S. fund firms, they only have to worry about the pieces of their products that are managed within Europe.
"It's a brave new world," Voss concluded.
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