Redefining rebates: Helping to avoid a European rebates ban through digitalisation, standardisation, and automation

In the ever-evolving landscape of the fund distribution industry, a contentious issue looms large: the role of rebates.

These financial incentives have played dual roles as both darlings and villains of the investment world, igniting a debate that centres on the delicate equilibrium between profit and ethics.

Critics have long contended that rebates can cast a shadow over the industry's integrity. They argue that these incentives have the potential to compromise the judgment of fund distributors, causing them to prioritise their financial gain over the best interests of their clients. This concern is certainly valid, as trust and transparency stand as the cornerstones of any thriving financial ecosystem.

On the flip side, advocates of rebates have staunchly defended them as a necessary component of the industry's revenue stream. They emphasise that these incentives play a vital role in sustaining the relationship between asset managers and distributors, enabling the latter to continue providing expert investment advice to clients. Financial partnerships must be sustainable for the benefit of all parties involved.

Transparency has long been a persistent issue in the realm of rebates. Sceptics argue that investors frequently find themselves in the dark, lacking a clear understanding of how these financial incentives operate and how they might impact their investments. In an era characterised by data-driven decision-making, transparency is of paramount importance, and investors should have access to comprehensive information.

However, the tides have been turning towards greater transparency in recent years, largely attributed to MiFID II (Markets in Financial Instruments Directive II). This regulatory initiative has ushered in a new era of openness, compelling distributors to provide more extensive information to their clients. Fund distribution platforms have played a pivotal role in driving this change, bridging the information gap and empowering both distributors and investors with knowledge.

One cannot overlook the complexities associated with rebate management. Asset managers frequently wrestle with intricate rebate grid structures and depend on outdated technology, including cumbersome Excel spreadsheets. These antiquated practices are undoubtedly time-consuming, susceptible to errors, and can result in opaque reporting – a stark contrast to the transparency expected by investors in today's digital age.

The proponents of rebate management, however, offer a solution to this conundrum: investing in distribution channel management technology.

The pressures associated with maintaining a broader fund distribution network and expanding assets under management have never been more pronounced. To meet these demands, asset managers must invest in fee and distribution management technology, which can transform their middle and back-office workflows. Furthermore, understanding the value of outsourcing is crucial for maintaining a competitive edge and ensuring operational efficiency.

The financial industry has undergone a seismic shift in recent years, propelled by rapid technological advancements. As investors become increasingly discerning, and regulatory requirements grow more stringent, asset managers are confronted with the dual challenge of expanding their fund distribution reach while maintaining rigorous compliance standards. The solution to this conundrum is found in technology.

Modern fee and distribution management technology provide asset managers (AMs) with the tools to streamline their operations. Through the automation of time-consuming tasks like fee calculations, rebate management, and reporting, technology empowers teams to concentrate on higher-value activities, such as portfolio management and client engagement. This newfound efficiency not only lowers operational costs but also enhances the overall client experience.

In addition to this, technology offers the transparency and data analytics necessary for making informed decisions. It empowers asset managers with real-time insights into fund performance, distribution channels, and investor behaviour. Armed with this knowledge, they can tailor their strategies, gain a deeper understanding of investor preferences, and optimise their distribution efforts.

Outsourcing emerges as a crucial factor in the pursuit of success. Recognising that not all tasks need to be managed in-house, asset managers can harness external expertise for specific functions. Outsourcing can encompass various aspects, including fee calculations, data management, compliance, the exchange of AML&KYC information, and even distribution support.

Additionally, outsourcing provides scalability and efficient cost control. Asset managers can adjust their operations to meet fluctuating demands without requiring significant in-house expansion. This flexibility holds value in an industry where agility can be a competitive advantage.

It could also be argued that outsourcing enhances focus. When asset managers delegate non-core functions to external partners, they can allocate their resources to core activities, such as investment strategy development and client relationship management. This shift in focus fosters innovation and the creation of client-centric solutions.

Ultimately, technology and outsourcing are symbiotic. Technology enhances operational capabilities, facilitating the effective management of outsourced functions. Integrated systems can seamlessly communicate with both internal stakeholders and external partners, ensuring a cohesive and efficient workflow.

By adopting modern rebate management tools or outsourcing fee management to specialised experts, the industry can embrace digitalisation, standardisation and automation.

Digitalisation: The cornerstone of modernisation

The path to revamping rebates begins with digitalisation. The financial world has witnessed a digital transformation across various sectors, and fund distribution is no exception. Digitalisation involves the conversion of manual, paper-based processes into digital formats, offering a slew of benefits:

• Speed and Accuracy: Digital systems process rebate data swiftly and with pinpoint accuracy. Tedious manual calculations are replaced by automated algorithms, reducing the risk of errors and omissions.
  
  
• Accessibility: Digital records are easily accessible and can be securely shared among relevant stakeholders, ensuring transparency and compliance with regulatory requirements.
  
  
• Scalability: Digital solutions can adapt to changing needs, whether it's an increase in rebate complexity or a growing portfolio of funds and clients.
  
  
• Data analytics: Digital systems provide a treasure trove of data that can be analysed to gain insights into rebate performance, investor behaviour, and distribution trends.

Standardisation: The bridge to consistency

Standardisation plays a pivotal role in improving rebate processes. It involves establishing uniform practices, formats, and protocols across the industry. The advantages of standardisation include:

• Transparency: Standardised rebate agreements and calculations make it easier for all parties involved to understand the terms, reducing disputes and confusion.
  
  
• Compliance: Standardised practices ensure adherence to regulatory requirements, facilitating smoother audits and reducing compliance risks.
  
  
• Efficiency: Standardisation streamlines workflows, making it simpler to process rebates and communicate with distributors, AMs, and investors.
  
  
• Interoperability: Standardised data formats enable different systems to communicate seamlessly, fostering collaboration and data exchange.

Automation: The key to efficiency and accuracy

Automation is the final piece of the puzzle for improving rebates in the fund distribution landscape. Automating rebate processes involves the use of technology to perform routine tasks, calculations, and reporting. The advantages are substantial:

• Efficiency: Automated systems handle rebate calculations, tracking, and reporting with unparalleled speed and precision, reducing the time and effort required.
  
  
• Error Reduction: Human errors, often associated with manual processes, are minimised, leading to more accurate rebate calculations and payments.
  
  
• Timeliness: Automated systems ensure that rebates are processed and paid promptly, strengthening distributor relationships and investor confidence.
  
  
• Scalability: As the number of funds and clients grows, automation adapts seamlessly to handle increased workload without adding significant operational overhead.

The triumvirate of digitalisation, standardisation, and automation constitutes the future of rebates in the fund distribution landscape.

Nevertheless, the elephant in the room remains the looming possibility of rebates facing a complete ban. Detractors argue that such a measure could discourage fund distributors from nurturing relationships with asset managers and providing a diverse range of funds to their clients. This concern holds validity, as open architecture and a wide spectrum of investment options are paramount for investors.

In defence of rebates, proponents view them as instruments that foster open architecture. They contend that rebates grant investors access to a broader spectrum of funds and incentivise asset managers to build stronger relationships with their distributors. This, in turn, facilitates improved product education and, ultimately, guarantees that the products recommended to clients are genuinely suited to their needs.

The rebates debate exists in shades of grey, far from a black-and-white issue. It is a nuanced matter that calls for a balanced approach. The financial industry must carefully navigate the delicate balance between profit motives and ethical standards. With the right mix of regulation, technology, and innovation, rebates can continue to shape a more transparent, efficient, and investor-friendly financial landscape. The challenge lies in finding this equilibrium and ensuring that both consumers and industry stakeholders reap the benefits.

Investing in fee and distribution management technology will become a critical success factor for asset managers. Consideration should be given to outsourcing non-core functions to dedicated experts, such as FE fundinfo, to maintain lean and efficient back-office operations. Furthermore, engaging dedicated service providers with no conflict of interest, acting on behalf of multiple asset managers and leveraging economies of scale, will enhance digitalisation, standardisation, and automation.

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Steffen Ahlers, Director Fee & Distribution Channel Management, FE fundinfo

This article first appeared in Professional Adviser on 6 November 2023