Adding Advisor Class Challenges Firms
June 26, 2000
While recent studies have repeatedly shown that investors want advice, fund companies are finding that moving into the advisor channel is fraught with problems.
Schroder Investment Management of New York, traditionally a no-load firm, is one of the latest fund companies to run into major obstacles in entering the channel. As of July 1, Schroder is eliminating its advisor share class on 11 of its 12 funds after launching the shares only two years ago, said Cathie Mazza, a vice president with Schroder's Funds.
Schroder Investment Management, which is a subsidiary of Schroders of London, could not generate enough interest in the class and had been subsidizing it since it was introduced, she said.
The firm wanted to diversify its distribution channels but did not dedicate the necessary resources to promoting the class, she said.
"We did some fledgling efforts, but we basically retrenched and are not focusing on that channel," she said. "A couple of years ago, we did some things like attending the various advisor conferences. But we did not have a field sales force pounding on doors."
That might well have been the problem, said Irving Strauss, president of Strauss Communications and head of the Mutual Fund No-Load Council, both of New York. Selling an advisor share class requires a dedicated sales force marketing to investment advisors, he said.
"I think a lot of firms thought that you could stick a sales charge on their funds and people would come banging on your door," he said. "[A company] needs branding to address that market. It requires a considerable investment in time and money and people power. It isn't just a question of sticking on a sales charge."
Schroder's is not the only no-load firm to struggle in selling an advisor share class. Strong Capital Management of Menomonee Falls, Wis. recently announced it was scaling back its efforts in launching an advisory share class. It also cited a lack of interest in the share class. (MFMN 6/29/00)
Besides a substantial investment and a dedicated sales force, success in the advisor channel requires funds with stellar performance and distinguishing characteristics, said Dennis Dolego, director of research for Optima Group of Fairfield, Conn., a mutual fund distribution consulting company. A fund that has a special investment approach or has a well-known portfolio manager is easier to sell to intermediaries, he said.
Small, lesser known funds have some advantages over large funds, Dolego said.
"[Clients] are really hoping to get advice and direction from the planner," he said. "Sometimes it helps to have the name, but on the other hand, there is value added in uncovering funds that the investor wouldn't come across on their own." But performance is crucial, especially for small funds, he said.
Schroder's funds have not performed well in recent years. Only one of its 12 funds has a four star Morningstar ranking, according to Morningstar of Chicago. Most of Schroder's funds have two star ratings, according to Morningstar.
Another factor that may have complicated Schroder's efforts was a revolving door in the firm's senior management, said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I., a mutual fund consulting firm. The firm's pricing of the shares was another problem, he said. The 25 basis point 12b-1 fee for the advisor share class was not nearly enough to recoup costs associated with selling through financial intermediaries, he said.
One method of recouping costs of an advisor channel is to add a higher minimum investment on the funds, but Schroder's advisor class had the same investment minimums as its investor share class, said Dolego. Schroder's advisor share class also had an expense ratio of 1.69 percent, while its investor share class had expenses of 1.42 percent, he said.
Part of Schroder's lack of success with its advisor share class was financial planners' preference for the cheaper of the two share classes, said Mazza of Schroders.
"[The class] just wasn't attracting a lot of assets and most of the clients, when given the choice, went with the investor share class," she said. The planners would rather offer the cheapest share class and then attach their own fees, she said.
Financial planners do not like 12b-1 fees attached to no-load funds, Dolego said.
"They are much more fee sensitive and they want to charge a planning fee," he said. "That could explain why people wouldn't invest in them." Financial planners will always offer their clients the cheapest of two classes of a fund, so it does not make sense to offer a more expensive share class, he said.
Developing relationships with financial intermediaries is not easy and takes considerable resources, said Scott Cooley, an analyst with Morningstar.
"A lot of funds are sold because of the relationships they have," he said. "I think you have to make a big commitment."
Fidelity Investments of Boston has been successful selling through intermediaries, but most funds have had a tough time selling advisor shares, he said.
"I think [Schroder] thought they could offer the class and rake in incremental money," he said. "Even the shops with good names have had a tough time. Even American Century has struggled with this."