Wholesale Channel Costs Have Escalated
March 19, 2001
The average outside wholesaler's salary climbed to approximately $409,000 in 2000 from $335,000 in 1999 and large fund firms' wholesaling costs rose 22 percent during the year, according to a study issued last week by Financial Research Corp. of Boston.
The study of wholesaling costs and trends found that 80 percent of the increase in costs was attributable to compensation increases deriving from an overall increase in sales. However, asset managers are closely watching their wholesaling costs because redemption activity and industry evolution has affected distribution models, said D. Chris Brown, vice president of research of FRC.
"Redemptions are one big issue," he said. "I think it's also that the industry is maturing, there are more product alternatives out there. ... We've had a bull market that went through the nineties up until recently and we've had [outside] wholesaling work in that environment but that's now changing, so the economics of the business are going to change ... there's a whole new focus on costs."
A lack of sales growth in the bank channel was one of the study's most striking findings, according to Brown.
"The bank channel performed very well on a net sales basis, but the growth of sales in the bank channel was the weakest of any of the channels," he said. Net sales in the channel totaled $14.8 billion in 2000, up just 16 percent between 1999 and 2000. All of the wholesale channels, including wirehouses, regional firms, independent broker-dealers, qualified retirement plans, registered investment advisors and insurance agents and direct and offshore channels reported a 109 percent average increase in sales between 1999 and 2000, according to FRC.
"What that told me is that not enough firms are focusing on the bank channel," Brown said. "Clearly the bank channel is dominated by some of the big players in the industry ... but if firms can find ways to position themselves with the banks to compete against some of these entrenched firms, then I think there's opportunity there."
The study was based on interviews with sales managers and finance executives at 19 investment management firms of all sizes. The study evaluated the wholesaling channels of asset managers offering mutual funds, variable annuities and separately-managed accounts. The study breaks the firms down by size and provides data on six large firms with more than $100 billion in long-term assets, nine mid-sized firms with between $20 billion to $100 billion and four small firms with under $20 billion in assets.
Each firm completed two surveys. The first gathered information on the quantity, experience level and compensation of each firm's wholesaling team and the second sought information on distribution-related costs including revenue sharing, marketing support and advertising. The study also draws from interviews with executives at five major broker/dealers.
Large firms' average total expenses of selling in wholesale channels increased 57 percent from 1999 to 2000, according to the study. The study estimates the total costs of distributing in each channel by weighting 1999 and 2000 gross sales against a figure that measures the focus each firm places on a channel. Each channel was rated by the firms on a scale of one to five, with one being little or no focus, to five representing intense focus.
Regional broker/dealers, qualified retirement plans and insurance broker/dealers were the channels that had the greatest yearly increase in costs for large firms, according to the study. From 1999 to 2000, costs climbed 91 percent, 90 percent and 63 percent, respectively, for these three channels.
The increase in costs in the regional broker/dealer channel could be the result of the firms demanding greater revenue sharing and support, according to the study.
"This may reflect the phenomenon of major distributors requiring investment managers to pay more to secure access across all of their subsidiaries," the study said. It may also be explained by an increase in fees charged by major broker/dealers for omnibus accounting.