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Questioning the Status Quo Adds Value for Funds

WASHINGTON - The best new idea in mutual funds might start with a trip to the gym.

It was a treadmill that inspired an executive at T. Rowe Price of Baltimore, who hopped on for a run, and finished with an idea to streamline rollover IRA enrollment - all thanks to the "quick-start" button, said Edward C. Bernard, chairman of T. Rowe Price Investment Services.

That's what Tom Kelley calls cross-pollination, or when ideas from one sphere of life influence another, seemingly unrelated realm. And it's a key component of innovation, said Kelley, author and general manager of San Francisco-based design and consulting firm IDEO.

"You can't just look in the rearview mirror to get ahead," said Kelley during the Investment Company Institute's General Membership Meeting, held here last month. "And it's not just about innovation. It's the pace of innovation. You have to out-innovate the competitor."

To do that, Kelley urged fund industry representatives to examine how their businesses run and question whether they could operate more effectively, because, although everyone acknowledges that innovation is important, too few actually make it part of their routine.

"If you keep putting it off, the next thing you know, someone has stolen your market," Kelley said.

In an environment as competitive as the mutual fund industry, innovation is not only important for a company's future, it's critical to today's survival, said Merrill Lynch Investment Managers President Robert Doll.

"One third of the revenues we'll be collecting five years from now are from products and services that [today] don't even exist," he said.

The question, then, is how to devise these new money-making ideas and strategies?

True innovation isn't planned, it's discovered during the course of one's regular routine, said Kelley, author of The Ten Faces of Innovation. It's what Kelley calls "meta-lessons," or the things one learns as a type of side effect of executing other tasks.

But meta-lessons are too often overlooked, so Kelley encourages people to practice what he calls "vous-ja-de." Unlike its better-known counterpart "deja vous," the French phrase describing a person's been-there-done-that sensation, vous-ja-de occurs when someone approaches a task they've encountered countless times before as if it were completely new.

"You have to go beyond the rational. Beyond the facts lie a lot of opportunities to learn," Kelley said. Bernard's quick-start 401(k) rollover story is only one example of the kind of innovations such experiences can yield. In that case, a relatively simple, common sense idea distilled a process that once involved about six weeks or a customer shuffling papers and mailing forms into a 15-minute procedure.

Besides saving customers time, it won T. Rowe Price business, because employees who were leaving their company's 401(k) program liked the seamless transition.

"If you don't do it in 15 minutes, you lose the customer," Doll agreed.

Another problem T. Rowe employees face is that they just know too much, Bernard said. Unlike salespeople and financial advisers, retail clients don't always understand the nuances of a small-cap fund compared to a large-cap fund. "The customer knows it's really important to save," Bernard said. Beyond that they are lost. The challenge was training T. Rowe employees to be able to speak effectively to investors with various levels of sophistication, he said.

Innovators must play the role of "anthropologist" and study how investors react to various circumstances, Kelley suggested. "Experience architects" then take that information and help devise company processes that better address investors' needs in a manner that is both relevant and valuable to clients. Solutions may range from better marketing brochures, to new target funds, to a new layout for monthly statements.

Another simple solution is to encourage clients to schedule electronic fund transfers from their checking to brokerage or IRA accounts.

Besides getting customers to do what they already know they ought to - namely, to save - fund companies must also help their own employees learn what they ought to be doing, but aren't. For that, Kelley calls upon "the hurdler," the person in an organization who identifies obstacles and determines how to overcome them.

T. Rowe Price worked with cognitive psychologists at Johns Hopkins University in Baltimore to better understand how customers feel about investing. Scientists asked a focus group that T. Rowe assembled to look at images and describe what type of emotions about investing they evoked. For their trouble, focus group members received $75.