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Intermediaries Have High Expectations

Mutual fund service providers are too slow in adapting to changing technology and business practices, according to financial intermediaries, including fund supermarkets, banks, and financial planners.

The increasing consumer focus on savings and retirement, and the unprecedented availability of financial information, is having a profound impact on the needs of financial intermediaries, said Darlene DeRemer of DeRemer and Associates of Wrentham, Mass. By 2007, traditionally-distributed, load retail funds will account for only four percent of the marketplace, said DeRemer. As a result, the operational and marketing programs designed to support this channel are quickly becoming obsolete.

DeRemer, who will moderate a panel at the ICI Operations conference this week in Orlando, Fla., identifies the Internet as important to the fund industry. A study conducted by DeRemer and Associates (with Prince and Associates of Shelton, Conn.) found that within five years, over two thirds of the industry's intermediaries expect the Internet to play an important role in their businesses.

The Internet will free them from tasks such as reconciling balances, confirming trades and daily settlements and enable them to focus on other kinds of services.

Rick Adkins, president of The Arkansas Financial Group in Little Rock, Ark., said in an interview that he welcomed companies that encourage the adoption of high technology solutions. Fidelity's online "Account View" and electronic statements, for instance, are provided free of charge to Adkins and his clients. These resources have allowed Arkansas Financial to compete with much larger firms and expand its territory, Adkins said.

Meanwhile, Adkins, who will be a panelist at the conference, criticized companies that do not know how to assist his fee-based business, approach planners with sales incentives or market ideas to individual funds.

"I could spend three afternoons a week talking to wholesalers who don't understand my business," said Adkins. Heavy turnover among wholesalers compounds the problem because new hires rarely discuss Arkansas Financial with their predecessors. As a result, Adkins must continually explain his business to companies with which he has long-standing relationships. He feels that a few companies, including MFS Investment Management of Boston, are moving in the right direction by suggesting to intermediaries broad approaches to investing by different demographic groups, rather than trying solely to sell their own products.

Contact with fund managers, however, is invaluable to Adkins, who gets most of the information he needs to make investment decisions through third-party sources such as Morningstar. Periodic meetings give him insight into what published numbers cannot enlighten him about - the future. Understanding the philosophy of fund management, including how management may react to market changes, increases Adkins' ability to choose between top-performing funds, he said.

Larger firms have different expectations of service providers. Skip Schweiss, vice president of DATAlynx, an advisor-only mutual fund supermarket based in Denver, Colo., said many of the problems that his company encounters with service providers can be solved through attention to managing relationships.

"(Fund companies) need to actively manage (supermarket) relationships as they would a good friend or a spouse or a great client," said Schweiss. "Some fund companies go all out to get signed up on our platform, then we don't hear from them. The fund companies that take the most active approach to managing their relationship with us are the ones that benefit the most from the relationship."

Schweiss, another panelist at the conference, is generally pleased with the service his company receives, although he said there are several opportunities for service providers. Improving automated transaction processing and account lookup methods could reduce the time and manpower devoted to routine procedures. Increasing supermarket access to institutional services and daily, dedicated operational contacts would speed the resolution of problems when they do occur. Schweiss also said that channel-sensitive pricing and revenue sharing can play an important role in promoting mutually-beneficial relationships with fund supermarkets.

Tom Sutter, vice president of Old Kent Bank in Grand Rapids, Mich., expects companies to streamline transaction processing.

In particular, Sutter would like to see more funds adopt standardized platforms such as Fund/SERV. The prevailing practice of balancing accounts and posting distributions through periodic statements and telephone calls to fund complexes lacks the efficiencies of time and labor offered by automated processing, Sutter said.

Sutter's concerns extend to the 401(k) market. Having more funds available through defined contributions and settlement would dramatically simplify Old Kent's internal record keeping.

Intermediaries, however, are reluctant to sacrifice many of the conventional services offered by fund companies while they move towards automation. DeRemer said that telephone support and educational assistance are still considered very important by companies dealing with service providers.