management industry in Italy

Financial advice and the future of the asset management industry in Italy Giovanni Siciliano Tutela del Risparmiatore e modelli di Governance nell Asset Management Milano, 20 gennaio 2014

OUTLINE I. Trends in the Italian AM industry II. Main industry weaknesses III. AM and financial advice IV. Market failures V. Foreign competition VI. The role o f regulation

Trends in the Italian AM industry Portfolio composition of Italian households attivitàfinanziarie Since 2007 Italian households have significantly lowered their holdings of AM products polizze azioni risparmiogestito obbligazioni titoli di Stato depositi erisparmiopostale 2007 2011 2012 5% 1 15% 25% 3 35% 4 45% 5 Source: Consob Annual Report 2012 Milano, 20 gennaio 2014 3

Trends in the Italian AM industry Net inflows by product type Net outflows have been significant since 2007, hitting mutual funds and insurance products worst Italy is now well behind UK, FR and GE in terms of AuM by mutual funds 160 120 80 40 0-40 -80-120 -160-200 -240 250 200 150 100 50 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net inflows and AuM of mutual funds across EU raccoltanetta patrimonio 2.700 2007 2008 2009 2.400 2010 2011 2012 2.100 1.800 1.500 1.200 fondi comuni promossi daintermediari italiani fondi pensione gestioni patrimoniali individuali polizzevitarami III ev fondi comuni promossi daintermediari esteri Totale 0-50 900 600 300-100 fondi Francia Germania Regno internazionali Unito Italia altri paesi europei 0 fondi Francia Germania Regno internazionali Unito Italia altri paesi europei Source: Consob Annual Report 2012 Milano, 20 gennaio 2014 4

Industry weaknesses Why bank ownership of AMC can be a problem? When distributors own producers (vertically integrated system) conflicts of interests may obviously arise. Rational clients may perceive this, and be less willing to pay for financial advice, or simply less willing to buy AM products in the first place In a captive market there are less incentive to cost reduction, innovation and to invest in product quality. Dissatisfaction for product quality may further reduce the demand for financial advice Milano, 20 gennaio 2014 5

Financial advice in Italy Financial advice to Italian households diffusionedel serviziodi consulenza 10 10 Incredibly tiny share of 8 8 Italian households get/demand personalized financial advice, even among more educated people 6 4 6 4 2007 2010 2011 2012 servizio di consulenzamifid consulenzagenerica consulenzapassiva Raccolta nessunaconsulenza netta e patrimonio dei fondi comuni in Europa distribuzionedellefamiglieche ricevono servizi di consulenzamifid in basealla modalità con la quale ricevono il servizio 2009 2010 2011 2012 famiglieche non sanno distinguere la modalità con la qualericevonoil servizio famiglieche ricevono una propostadi investimento su iniziativadell'intermediario famiglieche ricevono una propostadi investimento a seguito di una lorospecifica richiesta 10 8 servizio di consulenzae grado di istruzione 3 25% % di famiglie che percepiscono conflitti di interesse nel servizio di consulenza High share of households perceives conflict of interests in MiFID financial advice services 6 4 diplomadi laurea titolo di studio inferiore diplomadi laurea 2007 2012 titolo di studio inferiore nessunaconsulenza consulenzapassiva consulenzagenerica servizio di consulenzamifid 15% 1 5% 2007 2008 2009 2010 2011 2012 Source: Consob Annual Report 2012 Milano, 20 gennaio 2014 6

Financial advice in Italay Less than 1 of households who do get/demand financial advice are fully satisfied of the service Degree of of satisfaction with financial advice by Italian households 2011 2012 35% 3 3 25% 25% 15% 15% 1 1 5% 5% High share of households are not willing to pay for financial advice (more than 5 of households who declare to have a financial adviser are not willing to pay for financial advice) basso elevato basso serviziodi consulenzamifid consulenzagenerica consulenzapassiva Willingness to pay for financial advice by Italian households (dati a fine 2010) elevato Source: Consob Annual Report 2012 Milano, 20 gennaio 2014 7

Market failures If consumers are not willing to pay for financial advice, how distribution can possibly be remunerated? Rebates of management fees to distributors is the industry standard in a vertically integrated system. From a groupwide perspective, this is not necessarily a problem, though it might be that distributors are getting a disproportionally higher share of the value added of AM services. Lack of competition in distribution and inability to use the financial advice quality as a competition tool may hinder the emergence of new/independent AM players. They either have to pay to much to access distribution networks or the distrust in the quality of financial advice may make investors unable to identify good AM Hence main market failures come from excess market power in the distribution due to vertically integrated industry models and from informational asymmetries due to distrust in financial advice Milano, 20 gennaio 2014 8

Foreign competition 1.250 AM products distributed in Italy consistenze(miliardi di euro) 10 composizionepercentuale 1.000 8 750 6 500 4 250 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 fondi comuni promossi da intermediari italiani fondi comuni promossi da intermediari esteri gestioni patrimoniali individuali polizzevitarami III ev fondi pensione Fonte: Relazione Annuale Consob per l anno 2012 Market failures may imply that the market remains underdeveloped or that there are less AM services than what would be socially optimal AuM of mutual funds and insurance products is shrinking and foreign competition is slowly wresting a significant slice of the incumbents business. Milano, 20 gennaio 2014 9

The role of regulation Regulation should foster the development of an efficient market for financial advice and the MiFID review is going into this direction. Independent financial advice is the key to solve market failures, but the point is how to convey convincingly to investors that the service is really independent. This is the debate over MiFID revision (no rebates and sufficiently wide product menu). Even if investors get convinced, the question is whether the business model of independent advice is viable given the strong resistance to pay for financial advice? Milano, 20 gennaio 2014 10