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All Fund Channels Lead to Intermediaries

PALM DESERT, Calif. - While market volatility has eaten away at fund returns and turned yesterday's losers into today's winners, it has also been a catalyst to an ongoing trend - the increasing importance of financial intermediaries as a distribution channel.

That was the consensus among industry analysts speaking here at a mutual funds conference sponsored by the Investment Company Institute of Washington D.C. and the Federal Bar Association, also of Washington.

Developing a closer relationship with investors should be the goal of every fund company and financial intermediaries can be the vehicle for accomplishing that, said Avi Nachmany, executive vice president and director of Strategic Insight of New York. Fund companies need to focus on developing close ties with intermediaries because market volatility has created an environment in which many investors increasingly look to intermediaries for hand-holding, he said.

"Investors are going to come back to advice in this market," he said.

Fund companies should also consider offering a variety of products so that intermediaries have products to meet all their clients' needs, at all life stages, said Paul Schaeffer, a partner with Investment Counseling of Boston.

"[Advisors] establish a life-long relationship early," he said. "They start with mutual funds, or stocks, move to fund wraps once wealth is accumulated, then private accounts, alternative investments and private equity."

Net inflows into mutual funds in tax-deferred retirement accounts reached a 10-year high in 2000, climbing to nearly $200 billion, according to the ICI. That influx of assets has created significant market opportunities for funds in capturing 401(k) rollovers, said Nachmany. The growth in rollover assets is going to continue as baby boomers reach retirement age, he said.

An estimated $48.8 billion in 401(k) assets will roll over in 2005, according to LIMRA International of Windsor, Conn. By 2010 that figure is likely to climb to $70.3 billion and by 2020, it is likely to reach $117.5 billion, according to LIMRA.

The importance of the intermediary as a distribution force is being augmented by the growth in investors' retirement assets, said Schaeffer. Investors will be seeking advice and guidance to handle their assets, he said.

While that represents opportunity for intermediaries, investors and their intermediaries will probably be searching for conservative ways to manage retirement assets, Schaeffer said.

Even funds are turning to intermediaries, in the form of sub-advisers as distribution platforms, said Schaeffer. The number of funds using a sub-adviser in 2000 climbed to 53.8 percent from 27.3 percent in 1999, he said. That represents a climb from $500 million in assets in 1999 to $2.6 billion in 2000, Schaeffer said.

Intermediaries have also risen in prominence in recent years, thanks, in some part, to the Internet, said Steven M. Lipper, global markets director for Lipper of Summit, N.J. Nearly every prediction regarding the Internet's influence on the fund industry has not materialized, he said. Today, a higher percentage of fund sales are conducted through supermarkets and intermediaries than before the Internet was developed, flying in the face of some predictions that the Internet would supplant traditional distribution methods, he said.

Also, the Internet has raised the cost of doing business, not lowered it, he said. Fund companies need to offer a website with a variety of capabilities including that for selling funds and that is expensive, Lipper said.

While the Internet has provided greater product choice, information and devices to help individuals manage their money, it has also created an over-abundance of information that creates a need for more advice and guidance, he said.