Thoughts on the Future of Distribution
January 3, 2011
It is an exciting time to be in distribution at an asset management firm. Threats and opportunities abound.
The threats are clear: profitability is under attack as subdued markets make asset growth more difficult, distributors put the squeeze on revenue sharing, and astute, deep-pocketed competitors are using technology to advance all aspects of the business.
As for the opportunities at hand: evolving distribution to get more from less in a new landscape, rationalizing territories and compensation models, using technology to drive segmentation, and the new horizons of mobile devices and social media all allow firms to distinguish themselves.
At Kasina, we have defined three key macro trends (globalization is a fourth that is not discussed here) that are shaping our industry: Changing demographics, low-growth/low-return markets, and technology.
The demographic shift is forcing new product development and increasing clarity. Firms are grappling with providing low-cost beta products or truly differentiated and communicable alpha products. In addition, with the majority of assets are controlled by retirees and near-retirees and investor risk profiles changing, retirement income and products with downside protection are getting more interest.
The market is transitioning after the recession, and balance sheets and portfolios are deleveraged; as a result, easy asset growth and profitability is gone for asset managers. Perhaps as importantly, distributors' margins took a hit, and still fall well shy of those of asset managers. Consequently, there is a silent battle taking place as distributors look to exercise power over asset managers and subsume more profits. In reality, distributors control which products they position, how strong gatekeepers are, and the impact of National Accounts teams. With advisers allocating two-thirds of their flows to just three fund families, asset managers feel they are over a barrel.
Both capabilities of and demand for technology solutions makes prioritization mandatory; and, it continues to make technology central to firms' strategies, execution, reputation, and differentiation. Technology offers a sustained competitive advantage for those firms who can use it to capture adviser data and turn it into true business intelligence. Additionally, firms that invest in building and enhancing a high-quality website site that advisers use experience significant sales lift .
Margin pressure is absolutely increasing. With asset managers' operating margins at 29% and distributors' operating margins at 14%, firms are feeling significant pressure from their distribution partners. Many are being asked to provide their least-expensive share class (typically I shares) but to pay the "full" revenue share (what the revenue share would have been on A shares). Distributors are also asking for more in terms of marketing support.
We are finally getting to the point where most firms recognize that the traditional commission-heavy comp plans for wholesalers need to evolve, to recognize that in an uncertain sales environment, it is critical to incent effective behaviors (e.g. cross-selling, focusing on the right advisers, retention, etc.), as well as gross sales. Firms are also recognizing that National Account-driven platform wins are playing a greater role in attracting assets and such allocations require refinements to compensation plans.
This year, technology is critical to sales execs. From capturing data about advisers (through CRM systems, the Web, third-party data sources, and elsewhere) to analyzing that data to developing segmentation strategies to delivering information online (via websites, e-mail, and social media), technology has become central to firms' distribution efforts.
Here is how to develop intelligent distribution:
1. Optimize opportunities for profitability with distributors. This entails staffing national accounts teams with the best business strategies in the firm, aligning the firm's resources behind the them, and aligning national accounts' objectives (and compensation incentives) with those of sales. In addition, focusing on only the most profitable distributor relationships is vital.
2. Evolve wholesaling to get more from less. This involves having focus - choosing the right advisers at the right firms, a manageable territory structure (less than the current average of three states and 1,550 advisers). It also means using hybrid and internal wholesalers to the maximum, and externals to do only what cannot be done by lower-cost resources. Lastly, it means being more diligent about performance management and compensation to insure the best wholesalers are happy productive, and stay with the firm - and those in the bottom decile do not.
3. Get more diligent about marketing and segmentation to understand customers and prospects better. Gather data that enables you to differentiate among advisers; use this data to market to advisers' individual needs. Then, support wholesaling effort by providing your entire team with these valuable insights.
4. Lastly, advisers are embracing online, mobile devices and social media more than ever. If your firm doesn't provide the experience they are looking for, they will look elsewhere.
It is a tough environment to be distributing financial services. The public is skeptical of the industry, regulators are circling, markets have slowed, distributors are clawing for a bigger piece of the pie. On the bright side, margins are still strong, demographic and risk tolerance shifts are creating an appetite for new products, and technology opportunities abound. Distribution will continue to be as central to the industry as ever. Only how it is practiced should change.