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Demographics Data to Play Key Role


It's no secret that mutual fund companies have done a deplorable job of researching the behavior of their consumers. Industry executives point out that for years the likes of Procter and Gamble have been examining consumers' attitudes toward laundry detergent while consumers' feelings about investment products have been largely ignored.

Recently, some have been touting the benefits of researching consumer demographics. In a landscape where mutual fund supermarkets play an increasingly important role in fund companies' distribution models--and where each of those supermarkets are charging a mint for shelf space--executives say researching consumer demographics can save money and help companies more effectively market their products.

"It's a complete revolution taking place in the industry that you need to think about who the customer is and help meet their needs," said Jason Krantz, whose company, Infinata, develops software to help fund companies analyze consumer demographics.

The problem is, brewing in the midst of this new interest in demographics, is a struggle to collect the information. The data could be become increasingly difficult to come by because supermarkets, a key source for the information, may soon begin withholding it from smaller fund companies and others, Krantz said.

Supermarkets, can use the data to cut out asset managers and reap millions of dollars in transaction fees by going directly to the consumer, he said. Conversely, without the data, financial advisors are beholden to supermarkets, Krantz said.

"I think it's really a question around power," he said. "As long as [supermarkets] hold all the information of who their end customers are, then they own those customers."

Charles Schwab is among the first to withhold such data, Krantz said. Schwab can use the data to target specific investment products to consumer groups likely to buy them, he said.

"Younger customers are going to want more aggressive funds marketed to them. Older customers would want less aggressive portfolios," Krantz said. "The key for asset managers is going to be to make sure that they're marketing through the supermarkets as effectively as possible."

Years ago, when supermarkets played less of a role, data was shared more freely, Krantz said, mainly because, with less money changing hands, those at the helm didn't pay much attention to the issue.

Now, Krantz said more supermarkets will follow Schwab's lead simply because it suits them to do so. Supermarkets have become industry powerhouses, he said. The stakes are higher and using demographics is one way to edge out rivals.

The issue is compounded by privacy matters and the Internet. Schwab and others may also be motivated to hold demographic data close to their vests to protect customers Krantz said.

From Top Down to Bottom Up

Historically, companies didn't focus on consumer information because their products were developed in a "top-down" fashion, where financial gurus who thought they knew best came up with investment models, then sought out customers to buy them, said Chip Roame, a fund industry consultant at Tiburon Strategic Advisors.

By the late 1980's, discount brokers began outperforming traditional rivals. "The reason is the discount brokers function much more like consumer companies like Procter and Gamble," Roame said, adding that the lagging sectors realized, Wow, [discount brokers] are studying the customers, God forbid, and building what the customer wants.'

Roame said it seems obvious hindsight, but companies, more than a decade after that revelation, are still catching on. And Krantz said the momentum behind the drive for consumer data is fierce enough to propel his company with or without the help of supermarkets.

He says his firm will be able to help companies effectively analyze even the most impersonal of data, the way soft drink companies track consumers, but don't necessarily know the age of those popping quarters into a gas station soda machine.

"There's such a tremendous value to understanding [demographics] that regardless of whether you know who the customer is, you have to be performing strategic analysis," he said.