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Planning Demand Transforms Fund Industry


Not only do investors want to have their cake, but now they want baking lessons. As investors seek out advice more than ever, financial planning has taken on a vastly increased role in the financial services industry, which in turn has forced mutual fund firms to completely change the nature of fund wholesaling, according to industry consultants.

Wholesalers must now be consultative and specialized, and if firms want to achieve efficiency in the intermediary distribution channel, they will have to successfully incorporate technology and "virtual wholesaling".

"Everyone's a financial planner today," said Dennis Gallant, a senior consultant with Cerulli Associates. "These days there isn't one financial services firm that isn't trying to expand its distribution through financial planning and fee-based pricing."

Indeed, registered investment advisors (RIAs), independent and regional broker/dealers, national full service brokerage firms, banks and even insurance companies have begun offering financial planning services. That's not something new for RIAs or even independent broker/dealers, but it's a recent development for the other types of firms, said Gallant.

Gallant and colleague Matthew McGinness spoke about trends in the intermediary distribution channel at a Cerulli Associates industry forum in Boston last week.

Products Take Back Seat to Service

Many firms are offering financial planning services simply because demand for advice and guidance has increased dramatically. With more than 12,000 mutual funds (including share classes) and a variety of alternative products in the marketplace from which to choose, increased awareness and desire for tax efficiency and estate planning, and a current market downturn, investing is becoming increasingly complex, Gallant said. Ten years ago, financial reps were expected to provide execution capabilities and an array of products, first and foremost. Timely information and financial guidance were secondary. Now, guidance in the form of financial planning is primary, and has become one of few ways reps can differentiate themselves, Gallant said.

As a result, investment products have taken a back seat to financial planning, according to McGinness. Investors are now looking more for services than simply products. That shift has spurred competition from alternative products such as managed accounts, which can offer products within a customized planning package, and exchange-traded funds, which an intermediary might use to provide tax efficiency to meet a client's specific needs.

Opportunity Requires Realignment

Despite the increased competition that an emphasis on financial planning has brought to mutual funds, funds continue to be a core part of the financial planning business, and so the shift has also created opportunities for fund firms, McGinness said. But in order to take advantage of the opportunities, firms have had to adjust their wholesaling units accordingly, he said.

"Wholesalers have to deliver a lot more personal investment knowledge and portfolio expertise," said McGinness. "When products take a back seat to financial planning, wholesalers really have to develop a consultative relationship with clients. What does that mean? It's solutions-based selling, no longer product-based."

Creating a shift in how wholesalers operate is difficult and requires retraining them, McGinness said. Wholesalers have to be trained to abandon the product-push tendency, and have to be given consultative selling skills, increased investment education, and practice management training, as intermediaries' expectations and needs become more complex.

Service Requires Specialization

Reps' demands have become more complex because as the financial planning business has grown, they have become more specialized, McGinness said. "Reps have been serviced by one wholesaler in the past," he said. "Broker-dealer reps now span the spectrum of specializations. As a result, mutual funds have responded and started supporting wholesalers with specialists as well." Those specialists focus on areas such as defined contribution investments, separate accounts, insurance and annuity products, and estate planning and wealth management.

However, training wholesalers, adding specialists and sending them out into the field is a very expensive proposition for fund companies. Consequently, firms should employ virtual wholesalers,' McGinness said. These are wholesalers who stay primarily in the office and conduct as much business as possible via the phone and the Internet. They receive a lower salary, have very little travel costs and are easier to train and manage, so adding staff becomes feasible.

Naturally, virtual wholesaling does not work across all channels, and maintaining traditional wholesalers is critical as well, McGinness said. Virtual wholesalers work well, in general, with RIAs and independent broker-dealers because they tend to be earlier adopters of technology and are more willing than the wirehouses to skip the face-to-face time.

"Financial planning has really had a broad impact on the fund industry," said McGinness. "Fund companies have become more consultative. I think the wholesaling is really improving rapidly in response to changes in the financial advisor marketplace, even though there is the problem that it's becoming increasingly expensive. The intermediary has become more important, and so has the wholesaler."