The Rise of Direct-To-Consumer Distribution & New Opportunities for ETF Growth

Written by: Catharine Frick and Avery Stonestreet

We are in a transformative period in the financial industry. With the rise of data analytics, digital channels and the expectations of new investors in the market, the once one size fits all distribution model needs to evolve and make room for something entirely different, Direct-to-Consumer (D2C) models. This article explores where to start when it comes to reaching retail investors by leveraging a supplemental D2C strategy that will complement and enhance your current distribution approach.

What is driving the rise of D2C distribution?

Digitalization is the transformation of how people engage with each other by moving away from analog technologies to harnessing digital ones to reshape business models and provide new growth opportunities. This process is the main driving force behind D2C distribution.

In the context of the asset management and Exchange-Traded Funds (ETFs) industry, digitalization has been a game-changer for distribution. The demand for digitally available products and services has skyrocketed, further propelled by a surge in start-ups with digital platforms. This trend has been particularly pronounced in the aftermath of the 2020 pandemic, which acted as a catalyst for digital transformation. During this period, digital offerings became indispensable for both retaining existing clients and acquiring new ones. This digital momentum has been exemplified by innovations like robo-advisors and digital brokerage platforms like Robinhood, for example. These platforms, along with the embedded finance movement, underscore the digitalization of investment processes, where investments are now almost instantaneous.

Given this backdrop, the D2C strategy emerges as a viable approach for asset managers in the ETF industry. The rise and success of D2C models are intrinsically tied to the advantages of digitalization and are aligned with the expectations of today’s digital-first investors, making for a compelling distribution strategy for asset managers looking to stay ahead in a competitive market sector.

Trends Driving D2C:

• Supply Side: Advancements in cloud-based capabilities and outsourcing platforms have lowered barriers to entry.

• Digital Distribution Channels: The rise of social media as a credible marketing channel has allowed D2C brands to reach investors through digital marketing campaigns.

• Analytics: Advanced analytics have enabled D2C brands to adopt dynamic inventory models and leverage investor feedback for real-time decision-making.

• Demand Side: With millennials and Gen Z (the first “native digital” generation) holding significant spending power (estimated $1.4 trillion), there's a shift in consumer expectations towards customization, credible value propositions, and cohesive brand storytelling.

Why is D2C worth considering for ETFs?

ETFs are uniquely positioned in the financial market, making them particularly well-suited for D2C distribution strategy. ETFs are designed for investor accessibility. They are publicly offered, trading on public exchanges much like individual stocks, ensuring that retail investors can easily make investment decisions. The rise of robo-advisors and investment platforms, which offer a range of investment vehicles including ETFs and simplify investment choices for retail investors, further underscores this accessibility. In essence, the structure and market dynamics of ETFs align seamlessly with a distribution strategy that targets retail investors.

The broader financial landscape further accentuates the need for a supplemental D2C strategy. With nearly 40% of financial advisors projected to retire in the next decade, a staggering $10.4 trillion of client assets could be in flux. This impending transition threatens to disrupt the established relationships between asset managers and financial advisors. A supplemental D2C strategy can empower firms to directly capture a more significant portion of this value chain, while helping firms bypass intermediaries, alleviating shelf space issues, enhancing cost efficiency, and ensuring products remain accessible to the end investor.

"The introduction to D2C does not necessitate sidelining existing B2B models, rather to complement and enhance already existing models. Integrating ‘direct-to-consumer’ strategies, even in incremental phases, firms can ensure they remain relevant and poised for success."

Opportunities with D2C

The D2C approach promises more than a shift in distribution; it signals a new era of client engagement, data-driven decision-making, and operational efficiency.

Direct Client Relationship

One of the most significant advantages of a D2C strategy is the ability to forge direct relationships with retail investors through social media. This direct channel of engagement allows firms to offer more personalized communication, tailoring their offerings and content based on retail investor preferences and needs. Social media offers an immediate response loop that enables firms to swiftly adjust their strategy based on real-time client feedback. Such interactions also foster stronger brand loyalty and client trust.

Data Collection and Utilization

Data is gold. A D2C strategy empowers firms to gather detailed data on customer behavior, preferences, and investment patterns. This information provides actionable insights, which can be leveraged for targeted marketing and sales campaigns. With precise data at their fingertips, firms can craft marketing strategies that resonate with their audience, leading to higher conversion rates. Furthermore, these insights can be pivotal in guiding new product development or refining existing offerings, ensuring they align with consumer needs and desires.

Cost Efficiency

A D2C approach can be a game-changer in terms of cost efficiency. By eliminating middlemen, such as distributors and retailers, firms can potentially reap higher profit margins. This direct-to-market strategy also offers better control over inventory or "shelf space." The traditional value chain has led to a 'shelf space' dilemma, with available space for products dwindling at wirehouses and other wealth management firms. Firms can manage their offerings more effectively, reducing costs and minimizing waste from unsuccessful products. In essence, the D2C model streamlines the distribution process, ensuring firms get more bang for their buck.

Scalability and Agility

The digital-first nature of the D2C model allows firms to rapidly scale their operations, reach new audiences, and enjoy increased speed-to-market. This agility ensures that firms can quickly adapt to market trends, client demands, and any unforeseen challenges, positioning them for sustained growth and success.

Niche Market Positioning

For niche products, like ETFs, the D2C model is especially beneficial. It allows firms to target and reach specific client segments more effectively, ensuring their specialized offerings resonate with the right audience at the right time. Beyond product sales, the D2C strategy enables firms to foster communities around niche interests. This community-building enhances investor engagement, loyalty, and positions the firm as a thought leader in its niche domain.

"The D2C strategy isn't just a trend; it's a transformative approach that promises growth, efficiency, and a deeper connection with their investor base."

Barriers to Consider

Early adopters of D2C, stand to gain a significant competitive edge, benefiting from the first-mover advantage, and the ability to shape their brand narrative directly, fostering deeper trust and loyalty among clients. Embracing D2C can foster a culture of innovation, making firms resilient against future industry shifts. However, as with any transformative strategy, the road to D2C is not without the typical industry barriers.

• Regulations and Compliance: The financial industry is heavily regulated, and direct interactions with retail investors will require additional licenses or adherence to specific guidelines. D2C models also demand greater transparency and will likely require more comprehensive disclosures to ensure that retail investors fully understand their investment decisions.

• Operational and Technological: Traditional firms might not have the technological infrastructure to support a D2C model, requiring an investment in digital marketing platforms and robust cybersecurity measures.

• Knowledge Gap and Skill Set: In-house expertise to develop and manage a D2C strategy and the associated platforms will be at the forefront, potentially requiring new hires or partnerships.

With industry reports highlighting U.S. D2C e-commerce sales reaching a staggering $129 billion in 2021, the potential for this direct distribution is evident. The technological and operational challenges associated with a D2C model are becoming less daunting, thanks to the surge in fintech solutions. These tools simplify the transition to a ‘direct-to-consumer’ approach and unlock new revenue streams, enabling firms to tap directly into a more diverse investor base that might remain elusive through traditional B2B channels.

The introduction to D2C does not necessitate sidelining existing B2B models, rather to complement and enhance already existing models. Integrating ‘direct-to-consumer’ strategies, even in incremental phases, firms can ensure they remain relevant and poised for success. Starting somewhere, even with a hybrid model, can set firms on a trajectory towards expansive growth.

"As the financial distribution landscape continues to evolve, those who adapt, innovate, and engage directly with clients and potential investors will undoubtedly lead the charge."

“Where do I start?”

Now that you have a better perspective on where a supplemental D2C strategy can take your growth, consider three practical first steps when starting out.

1. Define the Role of D2C in Your Business:

Before any practical implementation, asset managers and ETF issuers must first align this approach with their overarching business strategy.

It's essential to determine whether the D2C model will standalone and or complement your existing B2B channels. Regardless of how you position D2C into your current distribution strategy you are able to tap into a new investor base without disrupting established partnerships and networks. This supplemental nature ensures that firms reap the benefits of D2C without a complete overhaul of their current model.

2. Start Leveraging Social Media:

Social media platforms are essential tools for direct engagement. ETF issuers can leverage platforms like LinkedIn, Twitter, Instagram and even TikTok to communicate with and educate retail investors. These platforms allow firms to share insights, market updates, and product launches, fostering a sense of community and approachability. Social media offers a two-way communication channel, enabling firms to gather feedback, address queries, and interact with their audience.

Compared to other marketing channels, social media offers a cost-effective way to enhance brand visibility. With targeted posts and ads, firms can reach specific demographics, ensuring their content resonates with the right audience and the right time. This cost efficiency makes it a practical first step for those looking to dip their toes into the D2C waters without significant upfront investment.

3. Get Expert Advice

Considering a shift towards a D2C strategy can be overwhelming and consulting an expert is a practical first step to get the conversation started. Seasoned professionals bring invaluable industry insights, an objective lens, and a tailored strategic roadmap. Their digital expertise ensures the adoption of the right tools, while their vast experience aids in smoothly navigating regulatory intricacies and preempting potential challenges. Additionally, consultants are instrumental in upskilling internal teams, ensuring long-term capability in steering the D2C strategy. Overall, seeking external expertise is not just a safeguard but ensures a more straightforward path to a sustainable and successful D2C integration.

Final Thoughts

The movement towards embracing a D2C strategy is paved with opportunities, insights, and the promise of unlocking unparalleled growth. As the financial distribution landscape continues to evolve, those who adapt, innovate, and engage directly with clients and potential investors will undoubtedly lead the charge. Remember, it's not about replacing your existing models but enhancing them with the opportunity of D2C. By leveraging the information provided in this article, you're in a position to start internal conversations and collaborate with the experts needed to kickstart your D2C endeavor.

Good luck!

Related: Unpopular Opinion: Social Media Matters Now More Than Ever