Regulator fears that industry consolidation will hit investor choice
Chris Flood
Dalia Blass said the SEC would look at whether technologies such as blockchain could improve access to fund distribution for small and midsized managers (Capital Insights)
The US financial regulator is set to examine whether investors’ choice of asset management companies will be damaged by competitive pressures that threaten to destroy smaller players.
The fight for survival in the fund industry is driving merger and acquisition activity, with many small and midsized managers seeking to forge alliances.
This situation is of concern to the Securities and Exchange Commission, which will begin an investigation this year.
The SEC wants to see if any barriers exist that make it harder for small and midsized companies and whether these can be addressed without sacrificing investor protection.
“I am concerned about what it will mean for investors, particularly main street investors, if the variety and choice offered by small and midsized asset managers becomes lost in a wave of consolidation and fee compression,” said Dalia Blass, director of the division of investment management at the SEC.
Ms Blass was speaking on Monday in San Diego, California, at a conference hosted by the Investment Company Institute, the trade association.
As many as a third of managers could disappear over the next five years, according to Marty Flanagan, chief executive of Invesco, the Atlanta-based asset manager. “The strong are getting stronger and the big are going to get bigger,” said Mr Flanagan in a recent interview with the Financial Times.
A price war raging among US asset managers has led to the cheapest mutual funds winning an increasing share of new business.
BlackRock and Vanguard, the largest asset managers, have spearheaded price cuts with their low-cost index-tracking funds attracting record inflows. Last year, the big two together grabbed more than half of global net new inflows into long-term mutual funds.
Fees have been driven down as a result of competition for the business of institutional clients and the bargaining power of large distributors selling funds to retail investors.
Many distributors have culled funds from their platforms as investors shifted to low-cost index trackers.
Five of the eight leading US distributors have rationalised shelf space by dropping 4,900 funds in the past two years, according to Deloitte, the financial services provider.
Ms Blass said the SEC would look at whether technologies such as blockchain could improve access to fund distribution for small and midsized managers.
The SEC may also set up an advisory committee to take a broad view of asset management issues. This could look at the effect of indexing on markets, common ownership, the consequences of the scale of investment management companies and the participation of funds in markets historically associated with banks and brokers.
Ms Blass said that while an advisory committee could not answer every question it would lend “transparency, engagement and rigour” to industry debates.
Her speech highlighted other priorities for the SEC in 2019. The finalising of new rules for both exchange traded funds and fund of funds has a “high priority” for the SEC. It will also seek public comments on proposals for the reform of business development companies and closed-end fund offerings.
Ms Blass said the SEC anticipated that it would publish proposals for modernising the advertising and solicitation rules for investment advisers as well as a proposal on the use of derivatives by investment companies.
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