Current developments in private investment – Massive changes in the market environment – customer reactions and adjustments of offers

With the provisions of MiFID II / FIDLEG, which came into force at the beginning of this year, banks and financial service providers face challenges such as cost transparency. In addition, innovation pressure from FinTechs and the massive expansion of ETF offerings are driving institutions to action. The changes made by the ECJ ruling in 2017 and new channels such as Alexa & Co. are giving banks and financial service providers new opportunities in sales. 

Cost transparency

The MiFID II entails increased transparency requirements towards the end client. The demand for and compliance with a complete cost statement by the sales department now applies to every bank and every financial service provider. While doing so, the cost information must relate to both the distribution level (service) and the product level. And, both, at the purchase and on an ongoing basis (every 12 months). This change represents a huge change to the old practice for banks and financial service providers, in which the costs were reported less prominently and precisely to the client. Specifically, this means that the demand for – ongoing – cost transparency will give clients new impetus with respect to the subject of closing their doors and the institutes are faced with yet another challenge, which is to take away this mental impediment from the client.

Expansion of the ETF offer

Regarding MiFID II, the new rules and the related cost transparency issue, the general developments of ETFs add further challenges for banks and financial service providers. More and more end clients are opting against active funds and tend towards passive products, as these often appear to be the best choice for end users because of their characteristics – but not for institutions. The low cost of passive funds makes them less attractive for institutions – together with the cost transparency requirement, this creates a real revenue challenge. Banks and financial service providers are forced to think of further ways and possibilities as to how the revenue margin can be maintained in these developments.

Innovation pressure through FinTechs

In the course of digitalisation, it is becoming more and more common for clients to get informed on the Internet about investment and get a better and better idea of investing their money online. This trend is supported by the FinTechs, which have been appearing more and more prominently on the market for some time now. For banks and financial service providers, this leads to an urge to adapt to new technologies and modern investment paths, such as robo advisor. Although not all clients have confidence in the new-modern FinTechs, but the course of recent months clearly shows that this will not remain a permanent state. The established institutions are thus under intense pressure to also offer the new ways of investment in their bank next to or with the FinTechs in order not to lose clients.

Decision of the European Court of Justice (ECJ)

The decision of the European Court of Justice on June 14, 2017 certainly contributes to facilitation when viewing the current challenges of cost transparency and the existence of FinTechs:

On June 14, the European Court of Justice ruled that the brokerage of asset management contracts is not an investment brokerage subject to authorisation. In its judgment, the Court points out that even if the conclusion of a portfolio management contract results in the portfolio manager accepting and transmitting orders to buy or sell financial instruments in the course of his administrative activity at a later stage, the contract itself does not involve such an acceptance or transmission of orders.

Thus, the experts in Luxembourg clearly rejected the previous administrative practice of Bafin. This judgment will increase the “popularity” of asset management to a considerable extent.


New voice communication channels

In 2016, Alexa came to Germany, before that she had already been established in the United States for a year. Google Home and other providers of modern voice communications soon followed. The fact that these communication channels are not only useful for leisure time and hobby is no longer a secret. Many banks are already paving the way and combining the modern language means with the banking business of end clients.

Although this trend is still pretty much in the origin, but also here, the institutes should be vigilant and know how to use the many possibilities for distribution. However, it is not enough here to create a link between previous programmes and Alexa and Co. – in order for a satisfactory and good functionality of both systems to work, it needs an extremely fast backend system – a portfolio management system, for example, as aixigo has developed.

Impact on customers and offers

For clients, these innovations mean a relief in their own money matters. New channels such as Alexa, Google Home & Co., for example, enable the account check-in from home and the introduction of cost transparency gives clients better insights into the cost benefits of bank offers.
Banks and asset managers across Europe offer fully comprehensive asset management starting at sums of less than € 100,000. Until now, this was only possible in many parts of the market at a multiple of this sum. In the Netherlands, due to changes in the market, portfolio management models continue to replace traditional investment advisory models. Asset management seems to be a real alternative for financial institutions and banks, despite all the challenges.

The solution: Digital Asset Management

With digital asset management, the institutes have new ways of coping with the upcoming challenges and, incidentally, creating a good sales channel. The process of digital asset management is one possible way to deal with the new challenges.

High performance portfolio management as a foundation for digital asset management

With the use of digital asset management, banks and financial service providers have opportunities for completely new services. Customer segments that could not previously be considered, such as in retail banking, can now be served. However, this requires highly efficient processes, automation and digitalisation.

The solution is a portfolio management system that can handle the large volume business because it e.g. offers an extreme speed. As a result, automated low-cost asset management can be offered as a new core product in the mass business and at the same time interactive information of the individual client about his or her investment, in particular via new language channels.

Mario Alves, Head of Sales and Partner Management aixigo
Published in Der Bank Blog

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