Morningstar Magazine - August/September 2017 - 23

China

Gross Capital Formation (% of GDP)

Other Countries

20
%
However, this next phase of fintech will not be
simply measured in dollars raised but by
the problems it solves. Financial services is fraught
with problems on both the provider and
the consumer side, and many of them are not
distinctly technology challenges.
"People are looking too heavily at the 'tech' of
'fintech,' and they are not focusing enough
on adoption," Jankovich said. "The technology will
inevitably continue to improve but will not
be of much use if the 'fin' aspect of 'fintech' is
not properly handled."
The panelists said that entrepreneurs need to
become knowledgeable about consumers'
financial needs and behaviors. "Entrepreneurs
need to understand the industry. They need
to understand the daily reality of consumers'
financial affairs, and the end value that they are
bringing to the consumer," Pascucci said.
Fintech delivers its ultimate value when it solves
real problems, the panelists said. They agreed,
for example, that the needs of middle- and
lower-income consumers provide good market
potential for fintech. Consumers on the lower
income scale are concerned first and
foremost with short-term income and expense
volatility, then with near-term liquidity, and lastly,
with long-term savings.
"We thought from the beginning that technology
was going to be the answer to how you were
going to deliver better financial health through
financial services," Schneider said. "At the
end of the line, there's a person, and you have to
keep thinking about that person ... To me, the
long-term vision is that we use the data that exists
and apply predictive analytics to find out what
people need to be better off."

Abolish Embedded
Sales Commissions

constituted 1.3% of commission-based assets
as of March, virtually unchanged from January 10
2007. By contrast, total Canadian indexed
assets overall grew from 3.4% to 12.6% over this
0
stretch, thanks mainly to the use of exchangetraded funds by fee-based advisors, institutions,
and do-it-yourself investors. Index funds
-10
also made inroads in most other major markets.

AMERICAS

Canada

-20
Morningstar
expects discontinuing
embedded
2010
2012
2014
2016
commissions would accelerate flows into lowercost active funds and index funds. After the
United Kingdom introduced new rules outlawing
trailing commissions in 2011, index funds' market
share rose sharply, from 6.9% to 13.5% of industry
assets from January 2012 through December
Embedded commissions should be discontinued
2016. When asset managers could no longer
because they align the financial interests
ACWI
exasset
US 100%
Hedgedrather
NR USD
Ex USA
NR USD)
Relative Return
ofMSCI
advisors
with
managers
than(relative
with to MSCI
giveACWI
advisors
incentives
to favor more-expensive
active funds, fewer advisors chose them. We 20
individual investors seeking advice. While clients'
welcome such competition from cheaper passive %
best interests are served by holding lowercost funds, asset managers have an incentive
alternatives, not to displace active managers but
to promote higher-cost alternatives from which
to pressure them to become cheaper.
10
they generate more revenue from fees.
Asset managers use embedded commissions
It does not take an imaginative leap to envision
to give advisors incentive to favor higher-cost
what the post-embedded-commission landscape
0
funds, creating a conflict of interest. For example,
could look like. With increasing numbers
of advisors adopting fee-based business models,
the commission paid to actively managed
funds typically is at least twice that for passively
the proportion of Canadian funds sold without
managed funds.
commissions has grown markedly in recent
-10
years. While fee-based share classes accounted
for 3% of advised fund assets in 2011, they
As a result, advisors in Canada overwhelmingly
now account for 15%, according to Morningstar -20
favor actively managed funds: Index funds
2000
2002
2004
2006
2008
2010
2012
2014
2016

The text below
from a June
2000
2002is adapted
2004
20065 letter2008
from Morningstar to Canadian regulatory
authorities in response to "CSA Consultation Paper
81-408-Consultation on the Option
of Discontinuing Embedded Commissions."

Index Fund Share Across Major Markets 2007-Present
US

Asia

Europe

Canada

Oceania

% of fund assets invested in index strategies
40
30.2
30
25.6

Lawrence Johnson is head of fintech engagement,
business development, with Morningstar. Collin Canright
contributed to this report.

13.8
12.6
8.4

20

10
0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: Morningstar. Data as of 03/31/2017.

global.morningstar.com/Morningstarmagazine

23


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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2017

Contents
Morningstar Magazine - August/September 2017 - Cover1
Morningstar Magazine - August/September 2017 - Cover2
Morningstar Magazine - August/September 2017 - 1
Morningstar Magazine - August/September 2017 - 2
Morningstar Magazine - August/September 2017 - Contents
Morningstar Magazine - August/September 2017 - 4
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