Analysts Debate Direct Distribution
January 28, 2002
There has been plenty of talk about the mutual fund industry's shift to selling its products through intermediaries instead of selling them directly to retail investors. Observers have been saying for months that investors, timid in a bear market, are turning to intermediaries for advice about how to invest their money.
And a statistic released by the industry's chief lobby group has played a key role in feeding that buzz. The Investment Company Institute says that mutual funds sold directly to retail investors fell from 23% of all fund sales in 1999 to 16% in 2000.
But a southern California marketing executive is taking issue with those numbers. Jim Atkinson, principal at Orbis Marketing Group, says many of the intermediary distribution channels cited by the ICI actually involve a good number of self-directed investors. That, he says, suggests that the number of people turning to financial advisers for advice may be smaller than the industry thinks, meaning there is still healthy demand for no-load funds. He recently wrote about the issue in his company's newsletter, "The Orb," which is distributed to journalists and fund executives.
"This number has been thrown around a lot and people are being influenced by that number," Atkinson said. "It's compelling on the surface, but underneath that surface there's a heck of a lot of stuff going on and it doesn't necessarily mean that the no-load channel is the wrong channel."
The issue comes down to how the industry defines distribution methods such as supermarkets, retirement plans and bank trust departments. Observers have traditionally considered those channels to be third-party distribution channels.
But Atkinson says that perception is outdated. Supermarkets, 401(k) plans and other channels include plenty of investors who pick their own no-load funds without the help of advice from a professional, he says.
"In the old days there were intermediary and direct channels," he says. "As those channels have developed, these issues have become more complicated."
For the record, the ICI defines third-party distribution channels in its Mutual Fund Fact Book as "employer-sponsored plans, mutual fund supermarkets, fee-based advisors, mutual fund wrap accounts and bank trust departments."
The ICI was unaware of Atkinson's criticism and says it is standing by its definitions of direct and intermediary channels. A spokesman at the industry group had little else to say on the subject.
Atkinson's ideas were met with skepticism by some analysts. Matt McGinness of Cerulli Associates, says the ICI's definitions are sufficient. All of the distribution methods the ICI considers to be driven by intermediaries include some form of advice for self-directed investors, he says. McGinness cited the example of Charles Schwab, which offers a portfolio checkup for a fee to those who use its online supermarket.
Conversely, says Cerulli defines the direct channel as "investors who invest directly with the fund company, have their records there and do not use any kind of intermediary."
He says the distinction is important for fund companies because "even a self-directed investor who makes his own decisions going through Schwab has his records with Schwab, not with the fund company. That makes it more difficult for the fund company to retain him as an investor."
Whitney Dow, an analyst at Financial Research Corp., says no matter how you define the distribution channels, the ICI statistic illustrates a significant change for fund distribution. "There are a number of ways that you can parse out different types of investors," he says. "But the overall trend is certainly an advice-driven model."
Still, Atkinson says the confusion has caused the industry to reevaluate its definition of the direct and intermediary channels. Firms, he says, are increasingly realizing that they need to compete in every market, not just direct or indirect channels. He says Janus and Strong Funds are two examples of companies that are pushing their products in both markets. And as the line blurs between direct and third-party distribution methods, the long-held idea that firms can sabotage themselves by competing in too many channels is waning.
For years, he says, many companies have been leery of selling both load and no-load shares because they were afraid that intermediaries would refuse to sell the loaded shares if investors could simply buy the same fund, without paying loads, directly from the fund complex.
Now, "the concept of channel conflict is dying," Atkinson says. "Successful firms need to be in every channel that they can be in."