Consolidation looms for UK fund supermarkets as retail investor demand fails to keep pace with market supply, says a new report from research group Datamonitor.
The report, "UK Fund Supermarkets," finds that the popularity of investing has attracted new players to the fund supermarket industry. At present, there are approximately 16 players in the fund supermarket industry in the UK. This is likely to increase to 20 by the end of 2001 with the launch of fund marts by financial services institutions such as Legal & General, Norwich Union and JP Morgan Fleming.
However, Datamonitor warns that the UK retail investment market will not be able to sustain such a high number of fund supermarkets in the long-term as the market will not grow fast enough to meet demand. The process of consolidation has already begun with the purchase of Interactive Investor International by AMP in July 2001. This is likely to be the first of several high profile fund supermarket purchases over the next few years, predicts the market analyst firm. Those platforms that do not have the backing of large financial services institutions and with low customer numbers and assets under management are most under threat.
Fund supermarkets also face competition from the Independent Financial Adviser (IFA) market - currently, the leading distribution channel for retail investments in the UK. Fund supermarkets that are operating in the business-to-consumer market must attract market share from this channel, urges Datamonitor.
The report suggests fund supermarkets need to target IFA clients by not charging a fee or taking a commission from the sale of the product and offering discounted products to investors due to low overhead costs. Several fund supermarkets, such as Charcolonline, iii - Funds Now and Virginmoney have attempted to replicate the advice process by asking a series of questions that narrows the selection of funds that an investor has to choose from.
Datamonitor also urges fund supermarkets to offer services to IFAs and encourage the channel to process new mutual fund business through their Web sites.
To distinguish themselves from rival sites, fund supermarkets must look to focus their offerings on fund research and analysis tools, the number of funds offered, and fund managers available, adds Datamonitor.
Darren Oliver, Datamonitor financial services analyst and author of the report, comments: "The majority of fund supermarkets in the UK tend to offer products to either direct investors or IFAs, with few catering for both. Datamonitor believes that the business-to-business (B2B) channel will become the leading source of revenue for fund supermarkets in the next five years, meaning that those fund supermarkets offering products to direct investors only will potentially lose out."
Egg's recent partnership with Microsoft's MSN platform shows the possibility of fund supermarkets co-branding or white-labelling their platforms for Internet service providers. There is also nothing to stop brandassurers from adopting the fund supermarket model in order to increase their presence in the retail investment market, suggests the report.