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Funds Still Out of Touch With Adviser Needs

BOSTON -- After all these years, mutual fund companies still don't understand their distribution partners, sales executives say. But before fund executives try to improve on their current models, they need to realize that distribution channels are changing yet again as investment advisers seek lower-cost, laser-focused solutions.

Most investment advisers who choose to register with the Securities and Exchange Commission have been managing assets for at least eight years, said Matthew Bienfang, senior research director of securities and investments at TowerGroup, at the National Investment Company Service Association's East Coast Regional Meeting here.

These highly experienced, registered investment advisers (RIAs) often have a small number of high-net-worth clients to whom they can devote a lot of careful attention and time, he said.

"The bulk of assets still lie in the national wirehouses, and the bulk of investment advisor firms are relatively small," Bienfang said.

The average RIA has lots of sales talent but not a lot of infrastructure, IT support or administrative background support, he said.

"The RIA is very retail-focused, but institutional in mindset," said Catherine Saunders, a managing director at Putnam Investments. "They've got to be really clinical and strategic about where they direct their resources."

The growing investor demand for lower fees and better customer service is forcing many advisers to abandon their loyalties to past business connections and traditions, unless their previous associates can adapt along with them.

Saunders said RIAs are seeking conservative equity solutions, tactical products and absolute-return options, rather than trying to fill out nine style boxes.

With so many investment options and data out there, it's easy for participants and advisers to get overwhelmed. Advisers need technology that helps them integrate and analyze client information and investment data from various sources, with the ultimate goal of making it easier to deliver solutions to clients in a straightforward manner.

"I believe clients need advisers who can deliver this kind of service, because people are seeking simple, consolidated and meaningful reports about their finances," said Tami Wihlen, a principal at Excel Securities and Associates.

The adviser's job should be to create simplicity and efficiency so participants don't have to try to make sense of a dozen different financial statements, she said.

"The marketplace is so fragmented, the only way to understand RIAs is to get out there and talk to them," Saunders said. "You've got to understand their business model before you can start deploying your resources."

Once a firm establishes a relationship with an RIA and begins to understand them, they should make sure to follow up with any promises they've made, said Bill Taylor, senior vice president and head of business development and the investment-only retirement group at Pioneer Investments.

"Hire professionals who understand the RIA market and then get out there and do what you say you'll do," he said. "Asset managers want to go to where the money is. We need to make sure we have the right people interacting with the right people."

Lower Fees

More than ever, it all comes down to fees. Investors have been clamoring for lower fees for years, and the recent bear market highlighted how much investors are paying and how much a steady fee can deteriorate profits over a long timeline. The most effective advisers understand this and are careful to show their customers where their fees are going and why.

The best way to reduce fees is to cut out the middlemen, but some middlemen like wholesalers and distributors are crucial to efficient operations, particularly at smaller firms. In that case, RIAs can look for distributors who can customize product offerings and who actively seek to competitively reduce costs through automation efficiencies.

When the Internal Revenue Service begins enforcing Rule 408(b)(2) regarding compensation to service providers, it will be a "game changer," said Daniel Steele, vice president and retirement consultant at BNY Mellon Asset Management/Dreyfus Investments.

Approximately 70% of the fees that the average person pays in their 401(k) go to investment management firms, Steele said. "How do you bring that down?" he asked.

"As competition continues to increase, fees will have to come down," Taylor said. "New products cost more to develop, and this will make business less profitable. Auto enrollment will be a big issue for increasing sales."

Auto enrollment options such as age-appropriate target-date funds are a great way to get young or new employees to start saving in their 401(k) plans early and help them gradually build assets until they are ready to take an active interest in their retirement savings.

These automatic options with their automatic features like auto portfolio rebalancing and auto contribution escalation can be expensive, with high fees sometimes outweighing their benefits, depending on market performance.