The low-return environment and regulatory change, such as the move to ban commissions in the United Kindgon, is expected to drive growth in exchange-traded funds and lower-fee funds in Europe’s retail investment market, suggests new research from Greenwich Associates.

Greenwich says that its survey of investment fund distributors in Europe — including private banks, fund of funds, insurance companies, independent financial advisors, and retail banks — reveals that firms are anticipating rapid growth in ETF sales, particularly for banks; dramatic reductions in fees in active products, especially core equities, driven by competition for assets and the proliferation of inexpensive passive funds; and the emergence of new products, and potentially lower fees, as investment managers fight to attract and retain assets in a challenging global investment market.

The research firm says that its study reveals that “investment managers are feeling the need to revise their product offerings and, in some cases, their fee structures, in an effort to remain competitive and relevant to customers at a time when market volatility is driving fund outflows and prompting many retail investors to hold onto their cash.”

It reports that ETFs have achieved traction across all distribution channels in Europe, particularly among private banks where 19.8% of third-party assets are now invested into ETFs. And, its study finds that ETF allocations are expected to grow across all channels in coming years. European retail banks are gearing up for a significant increase in ETF sales, with current ETF allocations of 4.2% of third-party assets expected to jump to 12.1% by 2014, it notes.

“Investment managers are coming to market with new ETFs because these products align well with changes in customer preferences and demands, including a growing emphasis on costs and fees and a desire to gain specific desired exposures,” explains Greenwich Associates consultant Lydia Vitalis.

And, Vitalis adds, “Regulatory changes, such as the Retail Distribution Review seeking to ban commission in the UK retail market, will bring about changes in the distribution landscape that will likely increase interest in ETFs further.”

Additionally, the survey finds that competition is likely to put heavy pressure on fees. Greenwich reports that while many of the active funds now carry fees in the 150 basis point range, some investment managers are coming to market with a range of low-cost core equity products with fees as low as 40 basis points. It says that investors’ increased focus on minimizing expenses and managers’ growing willingness to sell low-cost, beta-focused products suggest that additional fee compression is on the way. “We anticipate fees on core equity products to come down dramatically,” says Greenwich Associates consultant, Marc Haynes.

The study also sees a continuation of the trend toward open architecture, in spite of pressures from parent companies to sell more proprietary products at some distributors. The study notes that the UK is the most ‘open’ market with 81% of assets in third-party products, which it says is consistent with the prominence of the independent financial advisor (IFA) industry in the country. Whereas, in France, proprietary assets dominate fund distribution and only 29% of assets are allocated to third-party products.

Where firms see increased flows into funds, they expect it will be focused on alternative and thematic funds, including absolute return, commodities, new-style balanced or ‘diversified growth’ funds, and ecological/green funds. Distributors also predict significant increases in allocations to international equities, both developed and, in particular, emerging markets.

“What many of these products have in common is the opportunity to deliver growth in a generally low-return environment. Of course, these products can also deliver relatively high fees and attractive margins for fund distributors and managers — a fact that could color the future demand dynamic,” Greenwich notes.