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Growth Abounds for Streamlined Firms: Service Providers Help Fund Complexes Get Simple

WELLESLEY, Mass. - In order to compete in a growing marketplace, mutual fund complexes have to get simple, according to Brian Moynihan, president of global wealth and investment management for Bank of America of Charlotte, N.C.

And that means big opportunities for third-party service providers.

"We are complex," said Moynihan of his parent company, which, with $482 billion in assets under management, is the fifth-largest fund complex in the country. "We are trying to reduce complexity. You, as service providers, do that for us," he told attendees of the National Investment Company Service Association's General Membership Meeting, held here last week.

"I want someone to satisfy the demand before I create it," Moynihan said. The one company that achieves that could be richly rewarded, he said.

Part of Bank of America's efforts to simplify its fund complex include relying more on fewer service providers. About two years ago, the company looked at its proprietary Columbia Management 119 fund products and realized many were redundant. What's more, the company relied upon two different transfer agents and three service custodians, Moynihan said. After some reorganization, and significant analysis, the company whittled that list down to 76 funds, one third-party transfer agent and one third-party custodian, he said.

"We went to one provider for simplicity," Moynihan said, "We get all the scale we can."

The consolidation has realized $200 million in fee savings in the past year and a half. "That is a significant benefit through scale, all of which goes to the investor," Moynihan said.

That goes for products, too. When it comes to target-date funds, for example, he said, "we cannot have a customer face 45 [fund] choices," said Moynihan, who added that each salesperson in Bank of America's 5,800 branches across the country is moving between 13 and 14 products per day.

It's not efficient for the company to maintain each fund, since many may be very similar in composition, and it's not especially effective for the retail investor, who, more often than not, does not understand the intricacies of the products and is truly only looking for consistent returns, he said.

Even as companies expand their businesses, such savings become critical, because investors are becoming savvier about fees and more discerning about the fees they are willing to pay, he said.

In part, that awareness stems from President George W. Bush's plan to reform Social Security, which called for privatization at an estimated cost to individuals of 30 basis points. "The Federal government is educating Americans that if they pay more than 30 basis points, they are paying too much," Moynihan said. In a climate of weak performance, fund companies can't argue that investors are paying for stellar returns. "We can't take 200 basis points from a customer getting an 8% return," Moynihan added.

The proliferation of "more and more ubiquitous" hedge funds, value-oriented exchange-traded funds and the migration of stocks from the American exchanges to those in Europe and elsewhere, only exacerbate pressure on mutual funds.

"Low costs drive greater returns for investors," he said.

Adding to the trend toward consolidation is increased scrutiny from regulators, he said. The fewer providers a fund complex relies upon, the fewer sets of rules, different forms and practices the company must sift through to deliver information to regulators, he said.

This scrutiny has brought service providers to the forefront, said Nancy Wolcott, chief operating officer for PFPC. "The service provider used to be the snooze part of the [fund board] meeting," Wolcott said. But in recent years, that has changed. "Discussions that used to be back office, are now being held at the executive level," she said. Boards have even conducted their meetings in PFPC's Wilmington, Del., headquarters in hopes of getting a see-for-yourself understanding of what these companies do. "All of the details of the operation are under the spotlight," she said.

According to Moynihan, a single provider also helps engender a greater trust between the service provider and the fund company. That relationship helps foster the faith for the two million individual and institutional investors that BoA's global wealth and investment management division serves.

"We have to provide a seamless and strong client experience," Moynihan said. "We have to integrate product design, with trading [and] with the customer."

Effective third parties can provide that type of experience by working closely with fund companies, Moynihan added. "You're that wall between us and them," he said.

"Any change is an opportunity to add value for the client," said Peter Cherecwich, executive vice president for State Street in Boston. "If you [as service providers] can give the chief compliance officer the information they need, you can be paid for that."