Money Management Executive
Fund companies are starting to transform and modernize their distribution strategies as the asset management business becomes more consultative and investors look for value-added relationships.
"There is going to be a huge shift in the industry, and what has worked in the past will not work anymore," said Neil Bathon, the founder of Financial Research Corp. and now an industry consultant. "The industry has never been through a change of this magnitude before."
The most apparent change will be a value-added component in the distribution strategies.
"Everyone has been selling and pushing hot products," Mr. Bathon said, "and there hasn't been much more thought than that. Clients want solutions and a complete, holistic relationship with their financial adviser." People want investments to be sound and produce results they can rely on, he said. "Product information will not be enough."
Wholesalers' ability to influence product sales has diminished, mainly due to the growing power of centralized due-diligence analytical teams, greater innovation with products such as separately managed accounts and exchange-traded-funds, and investors' changing needs, according to a recent Financial Research report, "Reinventing Distribution: Aligning Wholesaling Initiatives With Corporate Goals."
The Boston research company interviewed 17 senior asset managers who rely primarily on financial advisers to distribute their products. Forty-five percent of the companies had more than $100 billion of retail assets.
Brokerage firms are becoming more selective about the investment firms they work with, and moving a product past due-diligence research teams is the first hurdle. Due-diligence teams consist of a group of analysts who analyze a fund and decide whether to sell the product on their company's platform. They are essentially gatekeepers, Mr. Bathon said, and "were not in the equation five years ago."
"Wholesalers need to sit with a due-diligence team and speak specifically and convincingly about product investment performance and value-added" services, said Jeffrey Ptak, an analyst at Morningstar in Chicago. As a result, wholesalers need to be more sophisticated than in the past, he said.
"Wholesalers used to influence sales, but now they support sales. There has been a huge shift in the value the wholesaler provides," said Dennis Gallant, the founder of Gallant Distribution Consulting in Sherborn, Mass.
New wholesaling models must be individualized to each company, according to the FRC study, because there is not a single best approach for everyone. Wholesalers need to evaluate each company and understand what drives change - financial pressures, external pressure, diminishing returns on wholesaling, or a disconnect between a company's approach to investment management and its approach to distribution.
Fund companies also need to understand their clients and target audience, being careful not to treat them as an indistinct group. "Firms need to be more in tune with target marketing," Mr. Bathon said, "and that will help with sales and marketing efforts as well."
However, fund companies face the challenge of complacent executives who are reluctant to change.
"Executive teams need to hear a compelling argument to convince them to change strategies," Mr. Bathon said. Once a decision has been made, the changes and new strategies may take about three years to execute, depending on the company.
Companies need to have a verified commitment to change and be clear about who is initiating and driving decisions. Additionally, the risks associated with change must be evaluated. The organization should decide whether the changes will be adopted companywide or as a more limited experiment.
The study examined five companies that had successfully adopted new distribution models. One shifted its focus to the gatekeepers and due-diligence analysts who oversee the platforms; it used only four wholesalers instead of five. The model cost less and did not require one-on-one selling by wholesalers.
Another strategy that proved successful was building a distribution organization from the ground up. The company hired a top asset manager, replaced its traditional wholesalers with hybrids - a mix between external and internal wholesalers, and narrowed the types of financial advisers it would pursue. The reorganization reduced costs and rapidly increased sales.
Another company hired wholesalers it thought had the right skills and attitudes - with the crucial requirement that they be technology-savvy. Proficiency in both the company's in-house systems and those of its target distributors became a core competency and a key differentiator.
To ensure that a new strategy will work, companies need a commitment from all employees to see it through. If the new plan does not work, sales managers or wholesalers must be encouraged to persist rather than falling back on their old ways.
Moving into new distribution methods can go wrong, though. Companies should avoid the pitfalls of fluctuating priorities and a reluctance to lay off staff members. If an employee is not committed to the change, he or she should be persuaded to go along with it or face being fired. A company in transition may revamp its hiring criteria to recruit people with different mind-sets than would have been desired five years earlier.
"There is going to be a major transition over the next decade," said Gallant Distribution Consulting's Mr. Gallant. "The industry is shifting, and advisers and consumers are emphasizing different needs. Asset managers need to be aligned and are becoming more institutionalized, objective, and quantitative."
"Asset managers are redefining rules and coming up with the right mix for them to be successful," said Lee Kowarski, a principal at kasina in New York.
