The European fund market is one of the largest and most dynamic in the world. With assets under management currently totalling around €15 tn and annual growth rates of around 4%, Europe offers considerable growth potential for international asset managers.
However, before entering the market, fund providers need to understand the complexity of European fund distribution in practice, as well as the diverse market requirements and legal frameworks. This article is intended to give an initial overview for international asset managers looking to enter the European market.
UCITS, AIFMD and other Regulatory Framework in European Fund Distribution
Two key regulations standardise fund distribution in Europe and make cross-border distribution easier: the UCITS Directive (Undertakings for Collective Investment in Transferable Securities) and the AIFMD Directive (Alternative Investment Fund Managers Directive). Understanding these directives is crucial. To put it in simple terms, the UCITS Directive can be seen as a ‘European passport’, enabling fund providers to distribute their funds across EU member states without additional approvals. The AIFMD, on the other hand, targets alternative investment funds (AIFs) intended for institutional and professional investors, requiring strict risk management and transparency standards.
In addition to UCITS and AIFMD, other fund forms and strategies—like hedge funds, specialised private equity funds, or specific real estate funds—do not follow these rules. There are severe limitations on the distribution of these funds in Europe because they are not UCITS or AIFMD-compliant.
Foreign providers of such strategies must rely on private placement, which differs from country to country and frequently entails significant entry restrictions. In some countries, private placement is wholly restricted, while specific approvals are required in others. Therefore, asset managers of these fund structures must thoroughly understand individual country requirements.
MiFID II: Relevance and Impact on European Fund Distribution
One of the most extensive financial rules in the EU is the Markets in Financial Instruments Directive II (MiFID II), which regulates consumer communications, investment advice, and the distribution of financial instruments. For fund distribution in the EU, compliance with MiFID II is not just a requirement but a commitment to ensuring strict transparency, fee structure, and product information standards.
The division of investors into three groups—retail, professional, and eligible counterparties—is a crucial component of MiFID II. Asset managers are responsible for making sure that their funds are marketed only to suitable investor groups and that investors are fully aware of the costs and risks involved with the product.
MiFID II also mandates that each product’s distribution strategy is documented and that all measures are in place to avoid conflicts of interest. A compliance strategy that meets MiFID II requirements is essential for asset managers who distribute their products directly or through third parties.
EU and Non-EU Fund Distribution: UK and Switzerland Particularities
When aiming for fund distribution in the European Union, asset managers from outside the EU must comply with distinct regulatory criteria. For the UK, rules changed with Brexit. British fund providers can no longer automatically distribute their funds in the EU but require specific approvals or must operate through local partners. Vice-versa, the UK’s Financial Conduct Authority (FCA) has introduced new registration and distribution requirements for investment funds, which fund providers must meet to access the UK market. This change in the regulatory landscape due to Brexit is a significant consideration for foreign asset managers planning to enter the European market.
Switzerland has also established its regulations under its own Financial Services Act (FIDLEG) and Financial Institutions Act (FINIG). International asset managers wishing to distribute their funds in Switzerland must establish a local representative or appoint a licensed distributor. This can be costly and time-consuming but is necessary for market entry and regulatory compliance. However, entering the Swiss market remains attractive for asset managers due to its wealthy and diversified investor base.
Choosing a License or Management Company for European Fund Distribution
A key consideration for foreign asset managers entering European fund distribution is whether they want to obtain their own EU asset manager license or use an external management company (ManCo). Each option has distinct advantages and disadvantages that need to be carefully weighed.
- Own License: An asset management license offers asset managers greater control over their funds and a direct relationship with regulatory authorities. However, it comes with substantial regulatory and financial commitments, as risk management, compliance, and reporting requirements are stringent. Asset managers planning a long-term presence in Europe and willing to meet these requirements benefit from their license’s flexibility and potential cost savings.
- ManCo Model: Using an external management company is a cost-effective alternative, particularly for asset managers lacking the internal resources to meet extensive EU regulations. ManCos handle regulatory tasks and compliance obligations, allowing asset managers to focus on investment management and distribution. This option especially appeals to fund providers who want to test the European market or only distribute a limited number of products. However, the ManCo route offers less flexibility and creates dependence on the partner.
Target Audience Segmentation: Diverse Preferences in European Fund Distribution
A successful European fund distribution strategy requires a tailored approach as the preferences of IFAs, banks, wealth managers, and institutional investors like pension funds differ significantly.
Independent Financial Advisors (IFAs) prefer funds with transparent fee structures and flexible investment options suitable for various risk profiles.
Banks often focus on conservative and sustainable products, as these meet the needs of their retail and institutional clients and are increasingly influenced by ESG standards.
Wealth managers often seek alternative investments, such as private equity or hedge funds, to offer differentiated sources of returns to their clients.
Pension funds and insurance companies prioritise stable, long-term investments with low risk and high ESG compliance, given regulatory demands and investor sustainability goals.
A targeted marketing strategy that addresses the needs of these segments strengthens brand presence and enhances distribution success.
Marketing and Target Group Approach: Keys to Successful European Fund Distribution
One of the biggest challenges for foreign asset managers is adapting their marketing strategies to the European audience and understanding that while it is still Europe, investor preferences differ from country to country. For instance, while Northern Europe favours sustainable and conservative products, investors in Southern Europe and the UK are often more risk tolerant. Understanding these differences and how they influence investor decisions is crucial for a successful marketing strategy, as it allows asset managers to position their funds according to the specific needs of each target group.
The choice of communication channels is also critical. Digital marketing efforts, mainly targeted online campaigns, are increasingly important. However, MiFID II imposes high requirements for communication and transparency in fund information. Asset managers must ensure their marketing materials contain comprehensive information on risks, fees, and potential returns and provide investors with a realistic product assessment.
To sum it all up
European fund distribution presents significant opportunities for foreign asset managers but requires a deep understanding of regulatory frameworks and market structures. Numerous aspects must be considered when entering the market, from choosing the right licensing structure (own license or ManCo) to complying with MiFID II and partnering with local distributors. Asset managers who can meet these requirements and develop a flexible, market-specific distribution strategy are well-positioned to succeed in Europe.
FundFinity supports international asset managers every step of the way, offering tailored solutions for European fund distribution to enable sustainable growth in this promising market. Contact us today to learn more. We look forward to discussing your growth objectives!
