As fund managers consider how to evolve and enhance their distribution strategies, they are being confronted by two trends.

The first is demographic, with a growing body of evidence that the industry’s client base is getting younger. In 2021, the median age of clients for the dominant UK fund platform Hargreaves Lansdown was 46, down significantly from 2007 when it stood at 58. The US story is similar, with Merrill Lynch reporting that a fifth of its new wealth management clients last year were under 45.

The second concerns the use of technology. Fund managers increasingly face competition from providers whose slick service is attuned to the needs of customers already well accustomed to seamless digital experiences. According to a 2021 Fenergo report titled “Weathering the Crisis through Digital Transformation,” most managers say that they have lost customers to “digital-first" competitors in 2020, rising from 78% in EMEA to 82% in North America and 93% in APAC.

The fund distribution of tomorrow

For managers, the implication of technology adoption and shifting customer demographics could not be clearer. It’s a game of survival of the fittest: fail to overhaul distribution in a way that meets the needs of a more demanding customer base and risk losing them to competitors who will provide the speed, service, and tooling. These service details are increasingly the bottom line for many customers – and not just those in younger age groups.

This convergence of new technology and shifting customer expectations represents a threat to managers, but it can also be an opportunity for those willing to grasp the digital imperative. Evidence suggests that many fund managers are beginning to adapt and seek a different kind of relationship with a new generation of customer. Following decades in which they have been comfortable with using fund platforms as their primary engine of growth, fund managers are now looking toward the benefits of direct relationships. A BNY Mellon study found that 80% expect to increase direct-to-consumer (D2C) as a distribution channel in the next three years.

Managers will not abandon the distribution channels that have served them well, but the D2C growth underlines a strategic imperative to move closer to the customer. As relatively anonymous entities to the many customers who invest in their products via platforms, fund managers have a desire to claw back brand recognition in a more competitive landscape; according to a survey by Accenture, almost all managers (97%) consider brand to be a differentiator, but 25% fear their own does not stand out from the crowd.

For funds, the future of distribution is not just a question of channels and tools, but also one of strategy. Many are seeking not only to reach a new category of customers, but to cater to them in different ways – with personalized recommendations, added-value services, and an experience closer to traditional wealth management than generic investment products. As distribution evolves, its role must be about more than efficiency of reach; in the emerging landscape of funds, it must also enable ambitious client service in an environment of ever-greater expectations.

Investing gets personal: the future of fund products

The question that follows is, how can fund managers adjust the nature and structure of their investment products to retain customer loyalty and meet customer expectations?

Foremost among these will be tokenization, or the use of distributed ledger technologies (DLT) that allow investors to hold assets as virtual entities (tokens) stored on a ledger that provides a single, universally accessible record of ownership. Benefits of this approach include reduced costs and the ability to convey fractional ownership of assets that have typically been restricted to those with larger asset pools (infrastructure, some real estate and private equity).

Technologies such as DLT and artificial intelligence promise to change how fund managers can build products and provide services and widen the demographic to which these can then be offered. For the first time, it is becoming feasible that a customer with a relatively small asset base could now receive the kind of investment service that would once have been reserved for high-net-worth or ultra-high-net-worth individuals. Once prohibitively expensive features such as separately managed accounts, direct indexing, and tax planning will likely become part of the mainstream offering as fund managers seek to expand their global reach – potentially bringing in a wider and deeper base of smaller accounts, all of whom can be served in more bespoke ways than before.

Industry research suggests that funds are looking to move quickly in this direction; 80% of asset managers surveyed by Accenture believe that ”customization for the masses” will be an important trend in the years ahead, while 61% are seeking to provide an ”enhanced personalized client experience” according to BNY Mellon.

Such personalization will likely become increasingly important as funds target the rising numbers of Millennial and Gen Z investors, who are often more engaged with their portfolios and likely to have a strong opinion about which asset classes they do and do not wish to be invested in. A combination of tokenization, AI, and slick user experience (UX) means we are getting closer to a world in which an investor can self-select a portfolio personalized to their interests and preferences, at the touch of few buttons.

That would be a dramatic departure for fund managers – bringing them into the territory of financial advisers and even threatening to make the traditional mutual fund obsolete. Yet it also carries the potential prize of making them indispensable to the investors whose decisions will shape the future of the industry.

The closer fund managers can become to these customers, and the more precisely they can meet their needs, the better placed they will be to navigate a challenging road ahead.