RDR fund volatility warning

Fund groups have warned the RDR will lead to increased volatility in fund flows and a greater share of assets going to a handful of the larger asset managers.

According to the IMA's annual fund management survey, a number of groups believe the impact of the RDR - which is likely to increase platform-based distribution and accelerate the use of guided architecture models - will have "profound consequences" for fund flows.

Groups say the increasing use of asset allocators making investment decisions on behalf of advisers could lead to millions of pounds entering or leaving funds at any one time.

One respondent says the RDR-led shift towards investment outsourcing will unquestionably increase the volatility and velocity of assets.

"It is quite interesting that in a market that is quite idiosyncratic, where thousands of people guided by thousands of IFAs make thousands of decisions, the environment is quite stable," the respondent says.

"When you move to consolidate onto platforms and single asset allocation decisions affecting large amounts of assets, you get everybody in and everybody out at the same time.

"Under RDR, small IFAs will think: ‘I am just an ordinary IFA and not a wealth manager good at constructing portfolios, I think I will hand over to someone else to do the selection and risk profiles.'

"Everyone is going to end up buying and selling China at the same time. RDR is going to move people into an asset allocation environment and the market will get much more volatile."

Guided architecture and investment outsourcing solutions are increasingly coming to market, well ahead of the implementation of the RDR.

The Cofunds platform last year launched its OBSR guided architecture service, while Cazenove linked with Towergate Financial earlier this year to offer model portfolio solutions.

Another survey respondent says the idea of open architecture is "dying quickly".

"Open architecture platforms deliver too much choice for consumers and create too much risk for platform providers. Going forward, we will be moving into a more guided architecture world. This might mean better margins for firms which can get their product onto somebody's guided architecture platform."

Schroders managing director of UK retail Robin Stoakley says the increasing use of guided architecture and asset allocation models is already well underway and will have an impact on traditional fund distribution.

"If you look at the professional fund selectors, the fund of fund managers for example, they gravitate towards similar funds and broadly agree on asset allocation," he says.

"They are broadly likeminded and are more active in asset allocation shifts than the adviser community."

With fund groups increasingly looking to access the guided architecture market, Stoakley warns smaller groups could struggle.

"Like anything it is about absolute performance and risk adjusted returns. But it is also about service and access to fund managers and the strength in depth of the group.

"While we see this as a big opportunity, it is definitely an issue for the smaller groups which have not got this strength in depth."

However, Cazenove head of UK advisory sales Rob Thorpe says the shift to guided architecture has already arrived.

"Guided architecture and outsourcing is already here. Look at the increased use of multi-manager and portfolio toolsets on the platforms - it already exists," he says.

"We have our retail fund business and the discretionary fund business and from our experiences we have not seen any differences with the flow dynamic from the different markets.

"These solutions will increase in importance in the lead-up to and after the implementation of the RDR, but it is too early to tell whether it will lead to a revolution of how we do business."