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Special Report


WASHINGTON - In the aftermath of the easy money of the 1990s, segmentation and retention have become the mutual fund industry buzzwords for the new century, and the new way of doing business.

At a session held during the Investment Company Institute's Annual General Membership Meeting here, two consultants discussed the importance of fund companies' focusing on knowing their customers and knowing how to keep those customers from jumping ship.

In the roaring 1990s, as driven by good performance, fund sponsors saw revenue increases, product proliferation, and a steady inflow of assets across all product lines. Retention was barely a concern, said Ralph Verni, a consultant and former president and CEO of State Street Research & Management in Boston. Firms have now come to realize that was an anomaly, he said. Now, executives are reevaluating what their most valuable assets are: clients.

In the same way that it is hard to lose weight but much harder to keep that weight off, acquiring new clients costs more than keeping veteran ones, Verni said. Companies are now considering ways to build customer retention rewards into the compensation plans of various employees, including wholesalers and frontline telephone reps who, by conversing directly with redeeming investors, may be able to convince them to stay or exchange to another fund, he noted.

To begin assessing retention strategies, firms must first segment their clients and decide who they really are, Verni said. It's important to remember that most firms really have two groups of clients, shareholders and financial advisers, Verni said. Then, companies must get to know who they are, which goes beyond just demographics, he said. What did they buy? What are their expectations? What are their hot buttons that will make them want to either stay or, alternately, leave? Once it's been determined who these audiences are, technology can be customized to best serve each group, he added.

The second step is to make certain that a firm's dollars match its words, Verni said. Are dollars being allocated to pay for proper resources? Does the company use compensation programs aimed at retaining shareholders? Has pricing been brought in line?

"Even with the huge shrinkage of revenue, declining net asset values and people taking money out, fund companies are still incredibly profitable," Verni said. "Pricing has not really adjusted much, especially on retention."

As for retention strategies, voluminous investor information and education are key components of retaining assets, Verni explained. Moreover, fund sponsors should seek out best retention practices from across the industry by seeing what their competitors are doing and looking to see what methods have worked on the institutional money management front.

Retention Rates

Despite best efforts, fund sponsors must remember that retention rates vary widely among firms and that asset outflows are a normal part of the equation, said Howard Schneider, president of Practical Perspectives, a consulting firm in Boxford. Among retail investors, annual asset outflows of 15% or more are common, with 10% annual outflows seen among investors within employer-based retirement plans. Even product turnover among financial intermediaries can be as high as 20% per year, Schneider noted.

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