Post-Recession Distribution Strategies
May 3, 2010
The aftershocks of the financial crisis have left us with fewer distributors, increased investment scrutiny by analysts, and the most severe competition for assets in the history of the industry.
Now that we are embarking on the "new normal," per PIMCO's Bill Gross, executives need to pause and revisit their distribution strategies to face these new challenges head on. Here are the key strategies that will focus and optimize distribution, and lead post-recession organizations to success.
Pick Your Battle Wisely: Focus on Scale or Differentiation. Assets are concentrating among fewer, bigger fund families. Battered equity investors have sought refuge in fixed income and exchange-traded fund products, which work well on platforms.
Combined with increasing commoditization, these factors are putting pricing pressure on asset managers-the result being that distributors are leaning heavily on them to alter revenue-sharing agreements and squeeze out greater margins.
Scale obviously gives firms much more efficiency and pricing power. Scale also impacts firms' spending abilities. For example, an asset manager with $1 trillion in assets under management can afford to have 200 external wholesalers while maintaining a desired profitability level.
Logically, a firm with $100 billion in AUM should then be able to spend one-tenth of what a larger firm might spend, while matching the larger firm's profitability. Are 20 wholesalers enough to support all the major bank/wires, independents and RIAs? Probably not.
Most $100 billion firms with traditional wholesaling models will need at least 40 wholesalers to cover all channels-double the cost of the $1 trillion firm. This example helps to illustrate why firms will need to revisit their distribution models, not to mention their overall business strategies.
If firms cannot or do not want to scale, they need to be nimble and have differentiated product strategies in order to thrive in this competitive new world.
Prioritizing Profits: Once you have selected the battlefield, winning the battle hinges on getting the most you can from what you have.
Now and going forward, when loyalties are weakened and resources are reduced, focus on the most profitable distribution relationships is more important than ever. Asset management firms need to identify what assets they can live without as a result of high cost, inappropriate product mix, or incompatible distribution strategies. A profit-and-loss evaluation of each relationship is needed.
We have identified six strategies that will enable distribution executives to transform their organizations and bolster their chances for success:
1. National accounts and sales need to be closely aligned in focus, goals and measurement of distributor relationships. Preferably, both functions report into the same head of distribution. Both are required to share budget responsibilities and communicate regularly to identify and manage opportunities with distributor relationships. Both functions are measured and rewarded on similar and complementary objectives.
2. National accounts is vital in the new normal to ensure that your organization gets the most profitable shelf space. Ensure you have the right individual to run this team and empower them with the trust and authority to organize the firm's resources to focus on key customers.
3. Staff up with hybrid, internal wholesalers and an enhanced web and social media presences to gain productivity at lower cost. Hybrid wholesalers can provide scale to the wholesaler relationship with second-tier advisers, who can be provided service and up-selling that is more personalized than an internal and more efficient than an external can deliver.
4. Firms have to go after the most profitable opportunities. Focus your sales teams on smaller, de-channelized territories and enable the wholesalers to work with your firm's high-value advisers. Using sound customer and market data, managers will have to target their field sales personnel with laser-like precision on geographically concentrated relationships in territories with the highest potential yield.
5. Focus national accounts, externals, hybrids and internals on the most valued relationships. For externals that would be their top 200 advisers per territory and monitoring performance carefully. Ascertain whether the external wholesaler or another sales role is influencing the assets derived from each account in order to determine to which advisers the external should be assigned. That forms the basis of a territory to which a firm's external wholesalers can provide expert assistance and increase overall assets.
6. Develop appropriate and flexible compensation models that support the firm's health and profitability in all markets. Managers should tie key wholesaler compensation in to the firm's profitability and help invest the sales team in the health of the company. Managers should devise performance-based compensation systems that tie a portion of variable pay to net sales (or a figure emulating net sales), up- or cross-selling activities, and team or business unit goal achievement.
While this would be a fundamental shift for many wholesalers and national accounts, this strategy mirrors the demands of the marketplace and aligns the sales and national accounts' goals with the firm's business objectives.
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