Balance of power seen shifting in advisor’s favour

The balance of power is shifting in the financial services industry. Those who control distribution are gaining influence, according to a panel of industry executives. The challenge for many advisors, therefore, will be to master the power they wield as guardians of their client’s assets.

“I think the fund companies have commoditized their product,” said Chuck Grace, vice-president and COO of Quadrus Investment Services, speaking at the Univeris Client Conference in Toronto. “FUNDServ today has 17,000 fund codes that they will trade over their system. To put that into perspective, there are only about 22,000 advisors in the MFDA world. We’re starting to saturate the market with product.”

While that should work in the advisor’s favour, Grace points out that the manufacturers really control the money once the sale is made, thereby also controlling the revenue stream of the advisor who made the sale.

“The manufacturers have lost power by commoditizing their offerings. The distributors could be said to be picking up power, because they are in the driver’s seat in that commodity market.

“I think we’re entering a period of awkward balance — kind of like teenagers at a dance. The manufacturers desperately need the distributors, but the distributors desperately need the manufacturers and their cash. Over time we’ll see the industry consolidate around dance partners where distributors and manufacturers will be much more tightly linked.”

Aside from the overt consolidation taking place in the industry, Grace says there is a wave of covert consolidation, where advisors are selling their business and retiring, and by doing that, shrinking the size of the industry and driving competitive pressures. Before the MFDA came on stream, there were about 25,000 advisors licensed to sell funds. That number is now rapidly declining to the 20,000 mark.

“If you talk to an advisor today, they will probably tell you that they are in the power seat, because they are in front of clients. They have the greatest influence in that respect,” says Grace. “But I think they would also tell you that they don’t really realize or appreciate that they are in the power seat because they are running so hard just to keep up.”

This is where the dealer needs to step in and provide more value-added services, says Scott Sinclair, president and CEO of Aegon Dealer Services.

“One of the fundamental flaws that I see with the model is that it’s been a competition based on compensation, rather than based on value.”

In building their competitive advantage around advisor compensation, fund dealers and managing general agencies have left themselves with margins that are too thin to support the build-out of value-added services, such as better compliance monitoring and education.

“I’m actually seeing a shift of power away from the distribution group, toward the manufacturers,” Sinclair says. “Not toward the manufacturers separately, but in the integrated world — where a manufacturer owns a distribution company.”

He agrees that manufacturers have commoditized their offering lineup, but says they have also set limits on shelf space among their distributors.

“My view of the shift is power moving away from the traditional distributor to the new model of distributor, which is the integrated distributor. I see that as the definitive shift.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com