"Comrade, if things are so good, how come they are so bad as well?" ran a Brezhnev- era Russian joke. Likewise, contradictions continue to abound in the retail market in Europe. Outwardly, Joe Public has never had it so good. With about 27,000 share classes on offer, he has nearly four times as much choice as his peer in the US. But more does not mean better. Freshly minted products are frequently churned out in the name of innovation which, in most cases, is just a leapfrogging game relying on the herd mentality driven by new lingo, fear and greed. For end clients, low financial literacy costs dear. Worse still, distribution is dominated by banks that offer little advice and place funds automatically with inhouse managers or those that offer the highest frontend commissions, irrespective of client needs. Where the distributors are independent financial advisers - as in the UK - they are neither "independent" nor "advisers": sales commissions drive the choice of products and providers. Thus, the charge list goes on and on. But, to be fair, that is only one side of the story.

"Yes, asset managers have flooded the market with copycat products. But I see growth in life-cycle funds with embedded-advice solutions influenced by an investor's age. Banks are also going into third-party funds via open platforms with preferred partners offering quality choice," says Giordano Lombardo, the deputy chief executive of Pioneer Investments. Emulating the new generation of gatekeepers in the US with a primary oath of allegiance to their clients, such banks are now deploying institutional quality tools to do asset allocation, manager selection and performance attribution analysis. They are offering packaged solutions. Funds are increasingly "bought", not "sold". This trend is gaining traction, especially with high-networth clients, according to a new study sponsored by Citigroup and T.Rowe Price*. Even the role of muchmaligned IFAs is changing. The gin and golfing brigade is a dying breed, as governments drive clients towards advice-based, solutions-oriented products. But advicebased fees are not here yet. Advisers rely on fund managers to combine riskfree and risky assets, enabling them to earn the commission on the whole sum rather than the proportion going into risky assets. In the US, banks control 25 per cent of the mutual fund distribution. In Europe, they control about 65 per cent. "But things are changing. What we have seen in Europe has been huge interest by distributors in fund managers who are able to generate superior returns via high conviction investment strategies," says Ed Rosengarten, chief executive of equities at M&G.

Thus, conflict of interest may no longer be a big issue. However, this change has yet to promote convergence in the fees charged by fund managers; quite the reverse, according to data on management fees, charges and net sales variously compiled by Fitzrovia and Feri. They show that the total expense ratio varies enormously for like-for-like products within each of the four distinct asset classes. The observations are indicative, not definitive. But they are robust enough to suggest that the retail fund market in Europe continues to eschew the time- honoured laws of demand and supply. "Mass affluent clients don't as yet have an understanding of price. They can even struggle with the simple notion of 'percentages'. Proper implementation of Mifid (the European Union's markets in financial instruments directive) will force a better, more outcome-oriented approach. And an improved simplified prospectus can't come soon enough," says Elizabeth Corley, head of Allianz Global Investors Europe. The prospectus enjoins fund sellers to know the client needs and drive up the quality of advice. Their success will require quantum leaps in the levels of financial literacy on the part of clients across Europe. But that is not all. After all, in the US rising literacy and open architecture have not avoided the "feel-bad" factor now prevailing widely among investors who manage their private pensions via mutual funds. For their part, European fund managers need to recognise that their galaxy of products promises dreams but delivers nightmares, like the Soviet era.