Promoting Competition in the Distribution of Mutual Funds
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Public Disclosure Authorized
Promoting Competition
in the Distribution of
Public Disclosure Authorized
Mutual Funds
LESSONS FOR SECURITIES MARKETS REGULATORY
AUTHORITIES IN EMERGING MARKET ECONOMIES
Public Disclosure Authorized
NOVEMBER
2017
Public Disclosure Authorized
ACKNOWLEDGEMENTS
This Policy Note was produced by a team of World Bank staff and external consultants. The
main authors are Ana Fiorella Carvajal, WB staff and Line Deslandes and Mark St. Giles, both
Consultants. The Note was produced under the oversight of Alfonso Garcia Mora, Director of
the Finance & Markets Global Practice and Samuel Munzele Maimbo, Practice Manager. The
team appreciates comments received from Catiana Garcia-Kilroy, Tanya Konidaris and Shan-
thi Divakaran, who peer-reviewed the Note.
The Note was shared with the securities regulatory authorities from the countries for which
country summaries were prepared. The team wants to extend its appreciation to the securi-
ties regulatory authorities and staff from the Australian Securities and Investment Commis-
sion, the Comissão de Valores Mobiliários of Brazil, the Securities and Exchange Board of
India, the Financial Services Commission of Korea, the Comisión Nacional Bancaria y de
Valores of Mexico, the United Kingdom Financial Conduct Authority, and the United States
Securities and Exchange Commission for their disposition to review this note and the com-
ments they provided. Errors, if any, are the responsibility of the authors.
The team appreciates the opportunity provided by the Growth and Emerging Markets (GEM)
Committee of the International Organization of Securities Commissions (IOSCO) to present
the findings of this Note during the GEM Annual Meeting held in September of 2017 in Sri
Lanka.
The report also benefited from knowledge products on mutual funds produced under the
Capital Markets Strengthening Facility funded by the State Secretariat of Economic Affairs
(SECO) of Switzerland, a key partner of the WBG in its commitment to assist emerging market
economies to develop their capital markets.
P a g e 2 | 71
Table of Contents
Executive Summary ................................................................................................................................................................. 4
Introduction ................................................................................................................................................................................ 7
Section I. Banks’ Dominance of Mutual Fund Distribution in EMEs .................................................................... 9
Section II. Key Drivers of Expansion of Distribution Channels in EMEs ......................................................... 12
Section III. Key Lessons for Securities Regulatory Authorities in EMEs ......................................................... 23
Annex I. Selected Data on MFs .......................................................................................................................................... 32
Annex II. Country Cases ....................................................................................................................................................... 35
Australia ................................................................................................................................................................................ 36
Brazil....................................................................................................................................................................................... 40
Chile ........................................................................................................................................................................................ 44
Colombia ............................................................................................................................................................................... 46
European Union ................................................................................................................................................................. 48
European Union- United Kingdom ............................................................................................................................. 52
India ........................................................................................................................................................................................ 55
Korea ...................................................................................................................................................................................... 60
Mexico .................................................................................................................................................................................... 62
United States ....................................................................................................................................................................... 65
Bibliography ............................................................................................................................................................................. 68
P a g e 3 | 71
EXECUTIVE SUMMARY
For many emerging market economies (EMEs) some of the benefits associated with
mutual funds (MFs) have not materialized yet. The causes for this are complex. In gen-
eral, in smaller EMEs the limited level of development of the capital markets is the main fac-
tor affecting product diversification and costs as there are not sufficient underlying assets
and/or depth in the capital markets to support the MF industry. In larger EMEs, other issues
play a role including the (i) the dynamics between MFs and other savings products and the
way all such products are taxed, which might lead investors to privilege certain products to
the detriment of others, (ii) the level of financial literacy and more generally the level of in-
vestors’ awareness regarding investment options, (iii) the way MFs are distributed and in
particular whether there is dominance in the distribution channels by one set of intermedi-
aries, such as banks, which can affect the choices that are effectively given to investors, and
(iv) the way the MF industry is regulated which could potentially create entry barriers.
This Policy Note focuses on distribution channels, the role they play in product diversification
and costs and how regulation can promote competition in MF distribution. In many EMEs
where both the capital markets and the MFs have reached certain level of development, dis-
tribution channels are dominated by banks and their groups. This dominance in turn allows
them to keep a “closed architecture” and to offer their clients only the products they manu-
facture. However, different forces are opening the doors to competition in the distribution
channels including (i) a higher level of development of the MF industry, anchored in a grow-
ing middle class with additional savings to invest; (ii) financial innovation, which has been
supported by demographics and the increased penetration of internet, social media and mo-
bile services; and (iii) regulatory reforms, some of them explicitly aimed at increasing com-
petition. These forces are driving the emergence of new distribution channels, particularly
but not exclusively in the form of electronic platforms which might enable retail investors to
access a wider variety of products, potentially at lower costs, and robo-advisors, which can
lower the costs of accessing advice, potentially enabling retail investors to be better in-
formed.
While this Note is more relevant to larger EMEs, many of its recommendations can be
equally useful and applicable to smaller EMEs. As indicated above, for smaller jurisdic-
tions tackling issues that affect more generally the development of capital markets might be
the priority, including for example, the macroeconomic conditions and economic growth, the
level of savings in the economy, as well as other factors that could be preventing companies
from coming to the capital markets. However, country context matters and depending on the
case, it might dictate the need to pay attention to distribution issues at an early stage.
In this context, the key lesson for securities regulatory authorities in EMEs is the need
to conduct a holistic review of their regulatory frameworks to ensure that legacy is-
sues do not hinder competition and that regulations allow room for innovation. While
authorities in many EMEs have undertaken reforms aimed at modernizing such frameworks,
in some cases legacy issues remain. In addition, in general conduct obligations and the appli-
cable regulations have been structured around the concept of face to face interaction. Thus,
it is important that regulatory authorities assess whether the legal and regulatory regime for
P a g e 4 | 71MFs effectively incentivize: (i) specialization of activities under a framework that allows the
use of technological solutions while at the same time ensuring that robust conduct obliga-
tions are in place; (ii) disclosure that allows investors to effectively compare services and
products; and (iii) advice that puts the interest of investors first.
Below are key areas of attention. All the recommendations provided have taken into con-
sideration the IOSCO Principles and Objectives of Securities Regulation and the standards
provided therein.
• Ensuring proportionality of requirements for fund managers. In an environment of
specialization of activities, capital requirements for fund managers might need to be re-
viewed to ensure that they do not constitute an undue entry barrier. This would be par-
ticularly the case for jurisdictions that already require that custody services are provided
by independent entities, since this is the most important risk for which capital is required.
In turn, custody services should be a regulated activity subject also to fit and proper re-
quirements, including robust capital requirements. In addition, regulations should allow
for outsourcing of administrative functions.
• Expanding distribution and advice under a sound regulatory framework. It is rec-
ommended that distribution be regulated as a separate activity subject to fit and proper
requirements as this could foster the development of independent distributors. In prac-
tice this should lead to an expansion of the type of market participants that could provide
distribution services. In tandem, regulations should allow the emergence of a category of
independent financial advisors, subject to fit and proper requirements (mainly expertise).
For both distribution and advice, regulations should allow the use of technological solu-
tions, while ensuring that conduct obligations are complied with irrespective of whether
the services are provided via human resources or technological applications, and that
risks unique to a particular channel are properly managed and disclosed.
• Improving disclosure and availability of information. Investors should be provided
standardized summary documents that allow them to better compare services and prod-
ucts and assess their value for money prior to investment and throughout the life of the
product. As internet penetration grows, securities regulatory authorities should consider
requiring that all such information be provided via dedicated websites, in addition to the
more traditional delivery mechanisms. In addition, they should consider promoting mar-
ket initiatives aimed at enhancing the availability of information across the industry.
• Promoting alignment of distribution with investors’ needs. An open question for se-
curities regulatory authorities in EMEs is whether distribution of MFs should be allowed
without advice, or whether for all or certain products (such as complex funds), some min-
imum level of due diligence should apply even if the funds are being sold at the request of
the client or bought directly from the fund manager or from a distribution platform with-
out the intervention of any other intermediary.
• Addressing conflicts of interest arisen from the way distribution and advice are re-
munerated. There are no clear answers yet as to how best to tackle the conflicts of inter-
est brought by the way these activities are remunerated. It is important, however, that
securities regulatory authorities consider how different remuneration structures, includ-
P a g e 5 | 71ing commission based remuneration, may impact or influence the products offered to cli-
ents, and ensure that this information is disclosed to investors in a manner that allows
them to easily understand all the costs involved and thus compare actual performance
across funds.
• Finally, the need to keep close monitoring and to ensure robust supervision of MFs
should be highlighted. Securities regulatory authorities should keep close monitoring
of developments in distribution channels with a view to gaining a better understanding
of how such developments are impacting product diversification and costs, and whether
risks are arising that might require a regulatory response. In tandem, they should also
ensure that a review of compliance with disclosure and conduct obligations is part of the
ongoing program of supervision for the fund management industry, including the review
of potential conflicts of interest arisen from remuneration practices and how firms man-
age such conflicts. They should also be ready to use enforcement powers as necessary to
affect the behavior of market participants.
P a g e 6 | 71INTRODUCTION
MFs are key vehicles for retail investors’ participation in capital markets, yet in many
EMEs some of the benefits associated with them have not materialized. The pooling of
assets allows investors to have access to economies of scale that can potentially translate into
a higher level of asset diversification and lower commissions, and to benefit from profes-
sional management. 1 That is why in many EMEs MFs have been at the heart of strategies to
develop the capital markets. Yet, while in many EMEs MFs are growing, there is still a limited
variety of products offered to investors, and there does not seem to be a push to lower costs.
The causes for this are complex. In general, in smaller EMEs the limited level of develop-
ment of the capital markets is the main factor affecting product diversification and costs as
there are not sufficient underlying assets and/or depth in the capital markets to support the
MF industry. 2 In larger EMEs, other issues play a key role including the (i) the dynamics be-
tween MFs and other savings products such as pension funds and the way all such products
are taxed, which might lead investors to privilege certain products to the detriment of others,
(ii) the level of financial literacy and more generally the level of investors’ awareness regard-
ing investment options, (iii) the way MFs are distributed and in particular whether there is
dominance in the distribution channels by one set of intermediaries, such as banks, which
can affect the choices that are effectively offered to investors, and (iv) the way the MF indus-
try is regulated which could potentially create entry barriers. 3
This Policy Note focuses on distribution channels, the role they play in product diver-
sification and costs and how regulation can promote competition in MF distribution.
In many EMEs where both the capital markets and the MFs have reached certain level of de-
velopment, distribution channels are still dominated by banks and their groups. This domi-
nance in turn allows them to keep a “closed architecture” and to offer their clients only the
products they manufacture. However, in some countries competition is starting to appear
driven by further development of the capital markets, financial innovation and regulatory
reforms.
Thus, the Note seeks to assist securities regulatory authorities in EMEs in ensuring that
the regulatory frameworks for the MF industry promote (or at least do not hinder)
competition in the distribution channels. To this end, the Note reviews the experiences of
select countries, including advanced economies (AEs) (Australia, the European Union, the
United Kingdom, and the United States) and EMEs (Brazil, Chile, Colombia, India, Mexico and
1 In addition, in the case of open-end funds, investors enjoy an easy mechanism for disinvestment as redemp-
tions are done directly by the fund.
2 There is a high correlation between fundamentals, in particular- the size of the economy in terms of aggregate
GDP and per capita income - and the level of development of the local capital market. This explains in large part
why, in general, capital markets are at an incipient stage in smaller and low-income countries. For larger and
middle-income countries, the significant differences across countries are explained more by the level of devel-
opment of key building blocks, from the macroeconomic environment, to the level of development of the ena-
bling environment, and robust market infrastructure to the state of development of the demand side, and in
particular an institutional investors base to anchor the market.
3 Issues that affect the development of the MF industry have been discussed in the WBG Report: Mutual Funds
in Developing Markets: Addressing Challenges to Growth, 2015.
P a g e 7 | 71Korea) and draws lessons from them suggesting key areas for regulatory attention. The Note
has three main sections. The first section analyzes the state of distribution of MFs in EMEs.
The second analyzes key drivers of the expansion of distribution channels. The third section
draws lessons for securities regulatory authorities. An Annex provides a more in-depth view
of each country analyzed.
While this Note is more relevant to larger EMEs, many of its recommendations can be
equally useful and applicable to smaller EMEs. For smaller jurisdictions tackling issues
that affect more generally the development of capital markets might be the priority, including
for example, the macroeconomic conditions and economic growth, the level of savings in the
economy, as well as other factors that could be preventing companies from coming to the
capital markets. However, country context matters and depending on the case, it might dic-
tate the need to pay attention to distribution issues at an early stage. 4
4For example, as will be further discussed in this Note, a significant amount of financial innovation is taking
place in many EMEs, including some countries where capital markets are at an early stage. This might require
them to tackle issues related to fintech in the distribution and advice of MFs at an early stage.
P a g e 8 | 71SECTION I BANKS DOMINANCE OF
MUTUAL FUND DISTRIBUTION IN EMES
In many EMEs, many different channels can be used for the distribution of MFs. There
is no consolidated information on distribution channels authorized across all EMEs. How-
ever, a survey conducted by the International Organization of Securities Commissions
(IOSCO) show the existence of a plurality of distribution channels across a wide range of
EMEs, in addition to direct sales by the fund managers. As of 2014 such channels included
banks, securities brokers, financial advisers, sales agents and to a lesser extent insurance
companies and fund supermarkets.
Table 1. MF Distribution channels in select EMEs
Insurance Securities Financial Sale Fund Su-
Banks Companies Brokers Advisers Agents permarket
Brazil X
China X X X X
Costa Rica X X X
Hungary X X
India X X
Indonesia X X
Kenya X X X
Korea X X X X
Malaysia X X X
Morocco X X
Pakistan X X X X
Peru X X
Saudi Arabia X X
South Africa X X X
Turkey X X
Source: WBG (2015) Mutual Fuds in Developing Countries (based on an IOSCO survey) 5
Yet, in most EMEs banks directly or through their affiliates dominate distribution.
While hard data is not available, WBG work in the field indicates that, with very few excep-
tions, such dominance is a characteristic of the MF industry in EMEs of all continents, and
with markets at different stages of development. In smaller EMEs, such dominance is largely
explained by the limited level of development of the capital markets compared to the banking
sector, which in turn leads to a limited role played by non-banking financial intermediaries,
and in particular by independent players.
5 Since the time of the survey developments have taken place in some of these jurisdictions that have led to
further expansion of the distribution channels. Such developments are explained in the next chapter.
P a g e 9 | 71In larger EMEs, such dominance is also fueled by the advantage of having a large and
captive client base to which banks can offer a wide range of financial services. Banks
know a great deal about their customers and hold a massive amount of data about their earn-
ings, savings, expenditure habits and even, investment preferences. They can successfully
mine that data to develop products that appeal to different customer groups. Also, many
banks are part of larger holding companies or financial conglomerates, which may include
affiliated securities brokers, asset managers and insurance companies, through which they
can supply services that are additional to traditional banking. Once a bank has captured a
transactional customer, it benefits from plenty of cross-selling opportunities.
Such advantage makes it difficult for new entrants to compete, including in MF manu-
facturing and distribution. New market entrants may be unable to find third parties avail-
able or willing to offer them administrative, custody, brokerage and advice services. Third-
party service providers already established in the market could (i) be part of banking groups
or have an exclusivity agreement with them, or (ii) charge high fees relative to a smaller vol-
ume of assets under management. In the meantime, independent, lower-cost, third party ser-
vice providers may be unable to enter a market due to the lack of volume of assets to service
outside of bank networks. As a result, potential MF providers may have to establish costly
and labour-intensive offices to perform all those tasks themselves. This requires significant
capital and is a high barrier, which may prevent them from entering the market and solidifies
the dominant position held by banks.
Markets are also more difficult to penetrate in less-obvious expected ways. In bank
dominated markets there is a tendency to lock-in customers by requiring them to open an
account with the bank to be able to deal in that bank’s funds. This makes changing from one
bank-managed fund to another fund time consuming, and many customers are put off from
switching by the anticipation of the “hassle factor” alone. The settlement processes involved
in completing transactions are also complex and time consuming. They still involve a fair
amount of manual intervention, which may cause error and delay in processing. This com-
plexity also contributes to investors refraining from moving their assets outside of their cur-
rent savings bank network.
These factors largely explained the dominance of banks’ distribution networks in
many advanced economies (AEs), where capital markets are at a later stage of devel-
opment. For example, that is the case for most countries in Europe, where banks still hold
between 60% to 80% of the market share of retail fund distribution, 6 although in many coun-
tries their position has eroded overtime. Only in a few countries, such as the United States
and the United Kingdom, the MF industry has developed in a different way for historical or
practical reasons, providing room for competition in distribution. 7
6 In France and Germany, they hold about 60% of the market share, while in Austria, Italy, Netherlands, Spain,
Sweden and Switzerland they hold 80% or more. See case study for the European Union.
7
In the United States, it is considered that the separation between commercial banking and securities business
imposed by the Glass-Steagall Act, allowed the emergence of a strong non-banking MF industry. Although banks
now participate in almost all aspects of the MF industry, the key players are still the MF managers that had
existed and built their businesses supported on the Glass Steagall Act, while brokers play a key role in distribu-
tion. In the United Kingdom, MFs have traditionally been sold through a large and diverse network of wealth
managers, independent advisors and stockbrokers offering wealth management services, who have accounted
for up to 60% to 70% of fund sales. The genesis of this dominant position was due almost entirely to two factors.
P a g e 10 | 71Banks’ dominance of the distribution network can have a negative impact on investors’
needs. Concentrating the distribution of MFs gives banks an advantage that allows them to
keep a “closed architecture’ whereby they only offer their customers their own products; ra-
ther than a wider range of products (what is called an “open architecture”). In practice this
could mean that investors are not having access to products that may be better aligned with
their investment objectives and risk appetite, or that they are buying products at higher costs.
It is important to note, however, that other factors play a role in product diversifica-
tion and investors’ choices. For example, as the experience of many AEs indicate the way
distributors are paid significantly influence the products they offer to clients. Furthermore,
ineffective disclosure can prevent investors from understanding the value for money of the
products they are being offered by their banks, and might make them less prone to move.
Finally, as indicated earlier in smaller EMEs, the limited level of development of the capital
markets itself is the key factor that influences product diversification and costs and exacer-
bates competition problems as services necessary for an independent MF industry might not
develop and new players would be less inclined to enter a (smaller) market.
The first was the payment of higher commissions by fund managers to various types of brokers and advisors.
The second was the rapid growth of unit-linked life assurance, a way of selling funds in the tax-favoured wrap-
per of life assurance. Most independent advisers offering funds grew out of insurance sales forces and specialist
insurance brokers. See case studies for United States and United Kingdom
P a g e 11 | 71SECTION II KEY DRIVERS OF THE
EXPANSION OF DISTRIBUTION
CHANNELS IN EMES
A confluence of factors is opening the doors to competition in MF distribution in EMEs.
Fund providers have been struggling to compete against established banks because of the
high barriers to entry and lack of a powerful brand. However, several factors are driving the
expansion of distribution channels outside of the bank network including a higher level of
market development and sophistication, financial innovation and regulatory changes. Those
factors carry tremendous opportunities, especially for larger EMEs where the net inflows
have been steadier and stronger over the past years.
1. Level of development and sophistication of the capital markets
MFs in EMEs still represent a small proportion of the total assets under management
(AUM) by MFs worldwide. 8 Worldwide MFs have grown from about US$ 28 trillion in AUM
in 2008 to about US$ 40 trillion as of the end 2016. Of this figure, MFs in the United States
accounted for about 47% of total AUM, while MFs in Europe accounted for about 35%. For
the same period, AUM by MFs in EMEs grew from about 1,9 trillion in 2008 and to about 3, 3
trillion in 2016. Thus, they represented about 8% of total AUM by MFs worldwide for 2016.
Figure 1. MFs Worldwide: Net Assets
$45,000,000
In millions of US dollars-year end
$40,000,000
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0
2011 2012 2013 2014 2015 2016
Rest of the World $25,968,354 $29,528,708 $33,986,349 $35,364,551 $35,187,442 $37,020,001
Emerging Markets $1,916,587 $2,340,462 $2,344,768 $2,655,481 $2,968,249 $3,344,114
Source: Investment Company Institute
8The figures included in this section correspond to open end-funds in jurisdictions whose data is collected by
the Investment Company Institute (ICI). Annex I provides a table with the complete data.
P a g e 12 | 71However, there are significant differences in the size and sophistication of MFs across
EMEs. MFs in EMEs are still modest in size; although the MF industries of China and Brazil
rank among the largest in the world, with roughly US$ 1.23 trillion and US$ 1.06 trillion in
AUM at the end of 2016, respectively. Penetration is also low. (See Figure 2 below). While
there are important differences in product sophistication, in general active funds with simple
strategies still make up the bulk of the MF industry across all EMEs. Trends observed in AEs
such as the rise in importance of passive funds and ETFs are not yet significant for the ma-
jority of EMEs.
Figure 2. Top MFs in EMEs by total assets
1,400,000 70.00
1,200,000 60.00
1,000,000 50.00
800,000 40.00
600,000 30.00
400,000 20.00
200,000 10.00
0 0.00
Net Assets Percentage of GDP
Source: Investment Company Institute and World Bank Data 9
Particularly in larger EMEs the rate of growth of MFs is likely to accelerate a result of
different factors, including a growing middle class. Several factors are coming into play
which should lead to further development of the capital markets, and the MF industry. First,
in many EMEs, macroeconomic conditions have improved significantly. In addition, in many
EMEs the demographics are changing, and the middle class is growing rapidly and this
growth is set to continue (see Figures 3 and 4 below). These factors combined are leading to
higher rates of economic growth, and an increase level of savings in the system.
9 The ranking has been done based on the countries for which data is collected by the Investment Company
Institute. GDP data obtained from WBG Statistics. GDP for Chinese Taipei not available.
P a g e 13 | 71Figure 3 The size of the middle class, 2000, Figure 4 Regional contribution to next mid-
2015 and 2030 (billion people) dle class billion, 2015-2022
Source: Brookings Institute Source: Brookings Institute
In general, higher levels of wealth are associated with a demand for more complex
products. For example, studies in Brazil showed that investors in lower income brackets left
their money in their saving accounts (poupança) or invested it in low interest paying bonds
and fixed income funds, while higher income levels were associated with a demand for more
sophisticated products. 10 This may incentivize the diversification of the offering within and
outside of the bank network. In Chile, until recently, banks had limited experience in selling
third-party products. However, driven by the demand from investors for a wider variety of
investment products, they are increasingly entering agreements to distribute third-party
funds, often those of foreign providers. These third-party products now account for roughly
10% of all sales of MFs. This trend is also likely to increase the demand for independent
advice. That said, it must be acknowledged that savings deposits remain the principle house-
hold saving product even in AEs. For example, according to European Central Bank figures in
the European Union 96.4% of households had savings deposit accounts and only 11.7%
owned MFs.
At the same time a more developed market is likely to attract foreign players which
could potentially increase product diversification. In this context, the importance of
branding should not be underestimated. This may give foreign fund names a competitive
edge in local markets. For example, in Mexico the advent of well-known international fund
operators is helping to raise awareness about different investment options available abroad,
and could potentially lead the domestic players to increase the products offered to investors.
With increased market development, third-party service providers, such as adminis-
trators, custodians, and transfer agents, are more likely to be established in a jurisdic-
tion. These third-party service providers enable the set up of fund managers outside of a
bank or large fund complex, without incurring the overhead expense of creating labour-in-
tensive back office services. Without independent third parties, it is challenging for smaller
fund managers to enter a market. As the case studies indicate, such type of third party ad-
ministrative service providers already exist in jurisdictions with relatively large MFs, such as
10 See Oliver Wyman and XP Investimentos. (2013). The Brazilian Retail Investment Landscape. Transforming
Savers into Investors.
P a g e 14 | 71Australia, Ireland, Luxembourg, and United Kingdom, and to different degrees they have al-
lowed for the existence of boutique fund managers. These services are starting to be seen in
larger EMEs such as is the case of India.
2. Financial innovation
In EMEs demographics along with increasing levels of internet, mobile and social me-
dia penetration are opening the doors to financial innovation. Millennials are the largest
and fastest-growing adult segment across the globe and they also comprise a larger portion
of the population in EMEs than in AEs. Studies suggest that millennials approach financial
services differently than did previous generations. They are less reliant on physical infra-
structure, and existing banking relationships. They prefer to rely on advice from their influ-
encers (parents, known peers via social media networks) rather than from professional ad-
visers. They are technology savvy and more connected. In EMEs, they are also wealthier than
the baby boomers and gen xers, and more confident in the future. Those characteristics, cou-
pled with an increasing level of internet and mobile penetration and recent innovations in
finance are converging to forge new ways of distributing MFs. 11
In connection with MFs, the first such innovation comprises internet based distribu-
tion platforms. Platforms act like a supermarket that allows investors, financial advisers
and/or wealth managers to select a range of different third party or in-house retail invest-
ment products. Many platforms also offer information, guidance, and investment solutions.
Some platforms also expand into other regulated activities such as offering regulated advice,
discretionary investment management and in-house asset management.
Most electronic distribution platforms have been developed in AEs. However, exam-
ples of platforms can already be found in larger EMEs. For example, fund supermarkets
exist already in India and Korea and an electronic platform is pending approval by the regu-
latory authority in Mexico. In both the cases of India and Korea the creation of the fund su-
permarket was an initiative led by the securities regulatory authority. As internet penetra-
tion continues to increase, it is possible that such platforms appear also in smaller EMEs.
In general, these platforms have the potential to add value to investors; however, it is
still early to assess whether such benefits are fully materializing. Platforms can poten-
tially (i) expand the products that investors have access to, (ii) allow them to make more
informed decisions via the information tools that many of them provide and (iii) lower the
costs of products to consumers, if they use their bargaining power to negotiate with product
providers. However, in most countries platforms are still at an early stage thus making it dif-
ficult to assess their impact. 12
11 See CACEIS and PwC (2015). Reshaping Fund Distribution: Winning Strategies and Tactics in a Disrupted
Environment.
12 See U.K. FCA. See U.K. Financial Conduct Authority (FCA) (2017). Investment Platforms Market Study Terms
of Reference.
P a g e 15 | 71Table 2. Distribution platforms around the world
Examples of B2B institutional and intermediary platforms
Some platforms are aimed primarily at institutional investors, pension funds and insurance com-
panies for example (B2B institutional) and others at advisers, brokers and independent advisers
for example (B2B adviser).
• UBS Fondcenter - Fondcenter is a subsidiary of UBS Asset Management AG, and is one of
the leading fund platforms in Europe. It brings more than 240 sales partners (distributors),
mainly banks and insurance companies in Switzerland, Europe and Asia, together with
more than 335 fund providers.
• Allfunds - Allfunds was created in 2000 and is owned by both Santander and Intesa
Sanpaolo. It has grown its assets under administration rapidly now has more than €190bn
on its platform, offering close to 38,000 funds from 450 fund managers. Probably the larg-
est in Europe, bigger than UBS Fondcenter. Recently sold to a US private equity fund.
Examples of D2C brokerage/ supermarkets
United States:
• Charles Schwab – one of the earliest entrants to the discount brokerage business has since
1973 been offering MFs at heavy discounts. It has recently cut its rates on ETFs and index
funds even further.
• Capital One is also a discount broker, one of the largest, that offers trades in no-load MFs.
Other Countries:
• The UK has many fund platforms. Bestinvest (UK), Barclays Stockbrokers (UK) and Charles
Stanley Direct (UK) are a few examples.
• Saxo Bank, in Denmark, with offices in Copenhagen, London, Madrid, Paris, Singapore, To-
kyo and Zurich
• Internaxx owned by TD Waterhouse, a subsidiary of the Toronto Dominion bank
• Swissisquote (Switzerland), offering cut price trades globally.
• FundOnline Korea (South Korea) an initiative of the South Korean regulator, was estab-
lished in September 2013. It is the country's 1st fund supermarket.
• Fundsupermarket (Singapore) Since inception in 2000, Fundsupermart.com has grown to
be the leading online investment platform in Singapore. In July 2007, Fundsupermart.com
expanded to Hong Kong, and this was followed by Malaysia in August 2008 and India in
2009.
• XP Investimentos (Brazil), the biggest fund supermarket in the country, which still only ac-
count for 1% of the country’s mutual fund market.
• Mas Fondos (Mexico) founded in 2002, was the first independent company to distribute
MFs in Mexico. It currently operates on an open architecture scheme.
These platforms offer online mutual fund transactions in several hundred funds from leading
global provider.
Examples of full service open architecture platforms
In the UK Hargreaves Lansdown is a good example of a D2C discount broker allied with a transac-
tion and service platform that also offers guidance to self-directed investors. It is the UK’s largest
direct to investor investment service administering over £70.0 billion of investments in ISA, SIPP
and Investment accounts for 876,000 active clients. This company has enjoyed great success in
providing a comprehensive service to its clients, which includes a fund selection tool, model port-
folios, wrap accounts and wrappers like ISAs and personal pensions.
P a g e 16 | 71Financial technology is also opening the door to other specialized services that have
the potential to expand mutual fund penetration, such as automated advice (com-
monly known as robo-advice). Robo-advisers offer portfolio construction and manage-
ment services based on algorithms derived from an online fact find filled in by the investor.
They seek to define investors’ objectives, time horizon and risk tolerance and offer a range of
suitable portfolios, using mainly low-cost index funds as components. This makes it possible
to offer to smaller investors, at an affordable price, portfolio management services that are
normally only
available to
larger inves-
tors. In EMEs,
for instance, a
lot of savings
are untapped
because the
traditional
banking net-
work does not
reach out to
smaller inves-
tors. Portfolio
management
services in-
cluding advice
require rela-
tively high min-
Source: CB Insights imum invest-
ment amounts,
which cannot be met by most potential investors. Robo-advisers can offer advice at a lower
cost, allowing innovative distribution channels to reach out to smaller investors.
This type of technological solutions is relatively new, and in operation mostly in AEs.
The US company Betterment was a pioneer; but now major fund management companies in
the US have introduced their own robo-advisers, including, Vanguard Personal Advisor Ser-
vices, which uses a mix of finance professionals as well as algorithms, Charles Schwab with
Schwab Intelligent Portfolios which only uses algorithms and Fidelity with Fidelity Go which
claims using finance professionals rather than just a computer algorithm and has made the
fact-find element more profound with more detailed questions about household finances
generally. The concept has spread to Australia, Europe and the UK, which has some independ-
ent start-ups for example Nutmeg. But the big players are starting to enter the market usually
by talking stakes in new start-ups.
However, it is expected that robo advisers will also gain ground in EMEs. Currently
there are robo-advice solutions in the larger EMEs, such as Brazil, China, and India. However,
it is expected that as internet and mobile penetration grows and costs subside, they would
appear also in smaller jurisdictions. A recent example is that of Kenya, where the launch of a
fintech sandbox, has triggered interest of market participants to test a robo-advice in the
P a g e 17 | 71form of an application solution for mobile phones, in line with the success that mobile based
financial solutions have had in this country. 13
Table 3. Examples of Robo-Advisers around the world, current AuM and expected growth
Countries Examples AUM in 2017* Annual Ex- Expected AUM
pected Growth 2021*
Rate*
USA Personal Capital US$182,505m 29.3 % US$509,555m
Betterment
Wealthfront
Vanguard Per-
sonal Advisor
Services
Schwab Intelli-
gent Portfolios
Fidelity Go
UK Nutmeg US$6,551m 52.0 % US$34,980m
Money Farm
Mexico None US$19m 8.9 % US$239m
Australia Six Park US$748 59.1 % US$4,796m in
2021
Brazil Verios US$8m 99.5 % US$123m
Magnetios
China Qianbaomu US$4,197.84 103.8% US$467,831m
Wacai
Lantouzi
Toumi RA
(launched in May
2016)
Xuanji (Novem-
ber 2016)
Machinegene In-
vestment (late
2016).Yinglibao
platform
(late 2016).
India Goalwise US$7m 103.8 % US$467,831m
Qianbaomu
Fund India
Big Decisions
Source Statista, 2017
13 Kenya has successfully launched a program for retail small investors to purchase government bonds in small
denominations via mobile money (Mpesa). The next stage will be pension savings using the same channel.
P a g e 18 | 71There are also other types of financial innovation, such as distributed ledgers, that
could potentially impact services required by the MF industry; but these developments
are at an earlier stage. Distributed ledger technology (DLTs) is allowing the verification
and recording of transactions on a peer-to-peer basis. DLTs rely on a digital and distributed
ledger, performing in a transparent environment, without the need for a trusted authority to
validate transactions. The ledger is operated automatically and can execute simple smart
contracts applications. By combining smart contracts with an automated ledger, DLTs could
potentially replace intermediaries in the MF industry, such as transfer agents and adminis-
trators. Thus, these developments may be particularly important to promote the emergence
of independent fund managers. However, as indicated this technology is at an early stage
and thus their utilization in the MF industry, is still being explored.
3. Regulatory Changes
Some EMEs have recently revised their regulations with a view to expanding the dis-
tribution network. In some cases, this has taken place as part of an overall effort to mod-
ernize the framework for capital markets or the MF industry. In general, these reforms
opened the distribution of MFs to entities different from their fund managers, but to varying
degrees. Further the way distribution is regulated also differs. In some countries, they are
considered a separate regulated activity subject to authorization either by the regulator or a
SRO, while in others it remains a responsibility of the fund manager.
Table 4. Regulation of distribution channels in select EMEs
JURISDICTION STATUS
Brazil Distribution of MFs can only be undertaken by distribution agents which include
financial institutions, brokerage firms, securities houses and individuals regis-
tered with the Brazilian Securities Commission (Comissão de Valores Mo-
biliários) (CVM). Portfolio managers can be distributors for the funds they man-
age, provided they meet the same obligations of distributors. Distribution agents
must be certified by AMBIMA, the self-regulatory organization of the Brazilian
securities market.
Chile Distribution of MFs can be conducted by the fund administrator or by any third-
party agent with which the fund administrator has an agreement. Typical third-
party agents include banks, stock brokers, investment companies, department
stores like Falabella or Ripley, financial advisors and, online platforms. It is im-
portant to note, however, that the responsibility for distribution of MFs remains
with the fund administrator. It is the responsibility of the fund administrator to
determine and monitor the suitability of any third-party agents that distribute
its fund products. The fund management company has a duty to inform the Su-
perintendencia de Valores y Seguros (SVS) who its sales agents are. In turn,
these sales agents must self-certify that they are suitable and have sufficient
knowledge of funds to be able to sell them.
P a g e 19 | 71Colombia Distribution is regulated as a separate activity that can only be undertaken by
the fund managers themselves or by specialized distributors, which are other
fund managers or banks. Distribution can take place through three different ar-
rangements: directly by the in-house sale forces of the fund manager; through a
network contract whereby another fund manager or a bank can distribute funds
through omnibus accounts (similar to nominee accounts in the UK and US) or
through correspondent agreements between local Colombian fund distributors
and foreign fund providers to distribute foreign funds in Colombia.
India MFs distributors are not directly regulated by SEBI; rather SEBI relies on the As-
sociation of Mutual Funds of India (AMFI) for their regulation and supervision,
although some distributors are registered with SEBI as another type of interme-
diary, such as an investment advisor or through employment at a stockbroker.
As per the current approach, a distributor or an employee of a distributor must
pass a special qualification exam and then register with AMFI, which maintains
a registry of licensed distributors. To increase MF penetration in underserved
areas, in 2012 SEBI created a special category of distributors (postal workers,
retired government officials, retired bank officers, retired teachers and similar
persons) which can distribute simple funds based on a streamlined certification
program and registration by AMFI. Pursuant to SEBIs’ rules all MFs must conduct
a due diligence investigation of a distributor prior to contracting it for the sale of
its funds. A heightened due diligence process must be used for the largest dis-
tributors. The due diligence must examine a distributor’s sales practices and its
internal controls. AMFI hires chartered accounting firms to perform a due dili-
gence review of each distributor. Every AMFI member relies upon this review.
The review must be conducted at least every five years.
Mexico Pursuant to the Mutual Funds Law distribution of MFs can be conducted by (i)
the fund managers themselves, (ii) investment fund distributors which are fi-
nancial entities exclusively dedicated to the promotion and sale of MFs, and by
(iii) by credit institutions, brokerage firms, insurance companies, auxiliary credit
institutions, credit unions, savings and loan institutions, financial cooperatives,
financial entities and currency exchange firms provided they fulfil the require-
ments established by the Law and the regulations. In the provision of distribu-
tion services all such institutions are subject to CNBV.
South Korea Under the Financial Services and Capital Markets Act those who wish to market
a CIS must obtain authorization from the FSC for investment trading business or
investment brokerage business. Banks and insurance companies must be au-
thorized for financial investment business, if they carry out any of the above-
mentioned activities. The Financial Services Commission (‘FSC’) is contemplat-
ing the creation of a new registration category for financial advisers who offer
advisory services only in a restricted range of financial products such as savings,
funds and derivative-linked securities and lower capital requirement for them.
Banks will also be allowed to offer financial advice within the newly-created cat-
egory of advisory services. In addition, independent financial advisers (IFAs) will
be newly introduced to provide ‘independent’ advice, free from product provid-
ers.
Source: WBG staff based on public sources
P a g e 20 | 71Other actions directly aimed at introducing competition have also being pursued. For
example, Mexico introduced reforms that prohibit MF managers from signing contracts for
the exclusive distribution of their funds, and require them to accept orders to buy shares in
the funds they manage from any third-party distributor. In a similar vein, Korea requires
MFs providers recommending an affiliated product to a client to also present a similar fund
from a competitor. In addition, India and Korea have been directly involved in the develop-
ment of electronic distribution platforms outside of the banking network.
Other regulatory actions aimed at improving the quality of information provided to
investors may also have a positive impact on distribution. The move towards better dis-
closure started in AEs, where funds are required to provide investors with a summary docu-
ment in a standardized format, before the investment takes place. These documents have the
potential to allow investors to compare more easily among products and with it, to assess the
value for money of different products, including those offered by the banking networks. As
the cases indicate such type of requirements are being implemented also in EMEs, and exist
already in all the countries analyzed. However, they are still pending in many smaller EMEs.
Further, the recent review conducted by the UK FCA suggests that there is still significant
room for improvement in the ways costs are disclosed to investors. 14
Other recent regulatory actions aimed at mitigating conflicts of interest in remunera-
tion could affect MF distribution. Some AEs have moved to ban commissions paid by fund
managers to advisors with the objective of improving the quality of advice. In Europe, the
UK, the Netherlands and Denmark have imposed a complete ban on all retrocessions by the
fund managers to any advisor, whether independent or not; thus, requiring that they be paid
by the investors. In other European countries, retrocessions remain permissible for tied and
multi-tied agents and bank branches. But MiFID II will significantly affect the possibility to
pay retrocession commissions to tied agents unless there is a value added in the services they
provide. Australia has banned conflicted remuneration in the context of the provision of ad-
vice. More recently, the United States imposed a standard of fiduciary duty for the investment
of pension assets, which is assumed will effectively ban brokers and advisors from accepting
commissions. In general, such type of changes have not been implemented in EMEs. How-
ever, in India SEBI has a proposal under consultation to separate distribution from advice
and to require distributors that want to provide advice to obtain a license of advisors.
It is still early to fully assess the impact of these latter type of measures. There have
been concerns that this type of bans would create an “advice gap” as investors would not be
willing to pay an upfront advisory fee. In the U.K., based on a survey of 2,000 UK customers
Deloitte estimated that as many as 5.5 million individuals would fall within that gap; 15 how-
ever a study commissioned by the U.K. FCA on the impact of the ban did not show such results
(see table below). But even if the ban were to trigger such results in some jurisdictions, it is
not clear whether technology solutions could partly fill the gap by providing access to lower
cost solutions. It should be acknowledged, however, that technology solutions do not work
for all investors.
14 See U.K. FCA (2017). Review of the asset management industry, Final Report.
15 See Deloitte (2012) Bridging the advice gap. Delivering Investments Products in a Post-RDR World.
P a g e 21 | 71Table 5. Assessing the impact of banning of commissions: Early feedback from the UK
The following are the main conclusions of a study carried out for the FCA by Europe Economics:16
• The Retail Distribution Review (RDR) has reduced product bias. In particular, there has
been a decline in the sale of products which had higher commissions pre-RDR and an in-
crease in the sale of those which paid lower or no commission pre-RDR.
• It has also made it easier for consumers and advisers to compare platforms, increasing com-
petitive pressure and leading to a significant reduction in Direct-to-Consumer (D2C) plat-
form charges.
• Product prices have fallen by at least the amounts paid in commission pre-RDR, and there
is evidence that some product prices may have fallen even further. This is due in part to the
introduction of simpler products and funds which have a lower charge and advisers and
platforms exerting more competitive pressure on providers, with platforms increasingly
able to negotiate lower product costs. The removal of commission also means that provid-
ers who sold lower or no commission products pre-RDR are now competing on a more
equal basis.
• However, there is evidence that the cost of advice has increased, at least for some consum-
ers. In relation to total cost of investment the ranges in pre- and post-RDR estimates of
platform, product and adviser payments, and the various ways in which these feature in
different investments, means it is not yet clear whether declines in product and platform
prices are more or less offset by increases in advice costs.
• There is little evidence that the availability of advice has reduced significantly, with advi-
sors still willing and able to take on more clients. While it may be more difficult for less
affluent clients to find an advisor, "there were still those in the market willing to serve
them."
• Finally, qualifications for the industry have increased.
It is also important to note that other remuneration structures can give rise to con-
cerns. While commission-based models can lead to the conflict identified above, fee-based
remuneration also has conflicts that can lead to poor investment returns (due to inattention
to “sticky” assets). Thus, there could potentially be situations (accounts that do not trade
often; or small accounts), where the commission-based model may be the least expensive
alternative. 17
16 See Europe Economics. (2014). Retail Distribution Review Post Implementation Review.
17 See FINRA (2013) Report on Conflicts of Interests.
P a g e 22 | 71SECTION III KEY LESSONS FOR
SECURITIES REGULATORY AUTHORITIES
IN EMES
The landscape of MF distribution is changing. There is evidence that competition is start-
ing to appear, initially in the larger EMEs. In many cases, such competition has been associ-
ated with technological solutions. However, the experience of India, which has created a spe-
cial category of distributors to reach less penetrated areas, is a reminder that in many coun-
tries human distribution would still need to be part of the equation.
MF regulations cannot assure the entrance of new players in the market, however they
need to be structured in a way that does not hinder competition, while at the same
time protecting investors. Indeed, for smaller markets with small MF industries, banks
might remain the main source of MF manufacturing and distribution for quite some time and
in those cases a key obligation for securities regulatory authorities will be to ensure their
compliance with business conduct obligations, including their suitability obligations. But in
tandem they need to ensure that as the market develops, the regulatory framework does not
unduly become a hindrance to competition. In this context, the case studies highlight the
importance for securities regulatory authorities to conduct a holistic review of the regula-
tions applicable to the MF industry, to ensure that they incentivize: (i) specialization of activ-
ities in an environment that allows the use of technological solutions; (ii) disclosure that al-
lows investors to effectively compare services and products; and, (iii) advice that seeks to
protect the interests of investors by allowing them to make more informed decisions.
Key areas of attention for securities regulators are included below. It is important to
note, however that there are other issues outside of the control of securities regulators that
could affect the distribution of MFs, and more generally the development of the MF industry.
One such issues is the structure of the pension system. In many AEs MFs are not bought as a
first choice. They are bought by proxy as components of pension and insurance products.
Therefore, one of the ways to encourage individuals to think more about how to invest would
be to give participants in second pillar defined contribution schemes the choice of using MFs
as an alternative option to the default managed portfolio. This would give independent man-
agers a distribution outlet away from banks. However, this is an issue that exceeds the scope
of this Note, and its potential implementation needs to be looked at as part of a holistic review
of the pension regime.
1. Ensuring proportionality of fund managers requirements
Securities regulatory authorities should review that requirements applicable to fund
managers do not hinder the entrance of independent fund managers due to legacy is-
sues. As indicated above, through different iterations many EMEs have modernized MF reg-
ulation, and establish frameworks that are based on a specialization of functions. Yet in some
cases the authorization requirements for fund managers have not been updated to reflect the
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