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Wholesaler Cuts Threaten Distribution Models

The events of Sept. 11 confirmed uncertainty about the future of the economy, precipitating a recent spate of wholesaler layoffs. Is this a trend?

"One of the things that a lot of people have asked lately is, where are we in the cycle of layoffs in the mutual fund and annuity industries. Some people feel we've just started and others feel it's just been blips here and there," said Matt McGinness, an analyst at Cerulli Associates.

McGuinness pointed out that nobody tracks hiring and firing among wholesalers or even is certain how many are out there.

Industry consultant Burt Greenwald said that trends in layoffs may not be immediately evident because many companies will not make public announcements of their cuts. "If the company isn't public," he said, "they don't have to make announcements about this sort of thing. Many of the companies are quietly cutting back."

A reassessment of sales staffs makes sense to McGinness, who said that many firms are necessarily asking, "What's the correct scale of wholesaling force to have in the field in this kind of market climate?"

Before Sept. 11, many firms clearly hoped to hang on and keep their hefty sales forces in place so as not to minimize their ability to take advantage of the eventual market upswing. However, the cost of wholesalers, bloated during the boomtime, has come to deeply overshadow sales.

"They were thinking it was best to keep as many people in the field as long as possible and ride it out. I'm assuming that people are starting to witness some margin compression because the sales aren't coming in," said McGinness.

Negotiating Realism

On the bright side, firms have regained leverage with wholesalers and are now able to negotiate more realistic contracts. "I have to imagine that there are a lot of national sales managers out there that are relieved," said McGinness.

Wholesalers that gloated about fat contracts two years ago are likely the first to get the axe. "In this kind of a market, the first people to go generally tend to be the ones that were locked into guarantees that were far too expensive for the firm," said McGinness.

While the effort to trim such a large expense in a deadened market is not unexpected, it does challenge the sales models at many firms and may force some to reconsider their distribution structure.

Eroding Efficacy?

"I think it might encourage more firms to dechannelize," said McGinness. By having wholesalers visit different distribution channels within their territories, firms may be able to keep territories small enough to support a consultative wholesaling model. "If you have 30 people dechannelized, you can still make the territories small enough," said McGinness.

However, for smaller firms, such efforts might erode the efficacy of the consultative sales model."If you have 40 people and you only have them cover one channel each, it's going to be hard enough for them to spend time with people to build the consultative relationship," he said.

The distribution model must accommodate the more global shift of financial advice to a fee-oriented model. While consultative wholesaling may be hard to support in this down market, firms are squeezed between trends within the industry and market realities.

"As broker/dealer reps and independent financial advisors embrace planning, product takes a backseat to financial planning. When product is less important, it forces the wholesaler to retool the product positioning so it's selected as a solution to part of the financial plan," said McGinness.

"I think that's not going away," he said. "It is made more difficult, but I think that's why a lot of asset managers are going to have to keep sales forces in the field that are a little larger than they like because they can't cut them and still effectively maintain these relationships."