(Bloomberg) -- Boutique managers, watch out.
Goldman Sachs Group Inc. says new European rules designed to improve transparency for investors are prompting fund distributors to cut the number of products they’re offering and hand larger pools of money to fewer managers. The shift is boosting so-called sub-advisory agreements, where a manager oversees assets for other firms, and putting more pressure on the industry to consolidate.
“MiFID II is increasing the volume of sub-advisory business in Europe,” said Nick Phillips head of the international retail client business at Goldman Sachs’s asset management arm. Distributors such as banks, wealth managers and investment platforms are “looking at their business model, saying how can we get better products to clients and have the best fund managers by consolidating them?’’
The European Union’s revised Markets in Financial Instruments Directive is placing a higher burden on distributors -- banks, wealth managers or investment platforms -- to make sure clients are sold suitable products and get value for the fees they pay. One way to limit the added compliance cost is to merge assets in similar funds into one strategy, often a fund run under the distributor’s own brand but sub-advised by a third-party manager. By reducing the number of managers and offering the remaining ones larger pools of money to oversee, the distributors can also push for lower fees.
Goldman has won 8 mandates in the last six months from firms that decided to outsource assets in that way. Phillips estimates such sub-advisory mandates could reach 1 trillion euros ($1.2 trillion) in Europe over the next three to five years, from 500 billion euros currently. Distributors that today work with 70 fund providers may eventually cut that number to 20 or 25, depending on the business model, he said.
MiFID’s push for fee transparency is also expected to encourage flows into exchange-traded funds, putting further pressure on active asset managers to justify their fee structures. For stock pickers already facing consolidation, that will only increase the pressure.
“Inevitably, there will be losers,” Phillips said.
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