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Funds Transform Distribution Strategies

Fund firms are starting to transform and modernize their distribution strategies to remain competitive as the asset management business becomes more consultative and investors look for value-added relationships.

"There is going to be a huge shift in the industry and what has worked in the past, will not work anymore," said Neil Bathon, founder of Financial Research Corp. and now an industry consultant. "The industry has never been through a change of this magnitude before."

The most apparent move will be a value-added component in the distribution strategies. "Everyone has been selling and pushing hot products, and there hasn't been much more thought than that," Bathon said. "Clients want solutions and a complete holistic relationship with their financial adviser," he said. People want investments to be sound and produce results they can rely on. "Product information will not be enough."

Wholesalers' ability to influence product sales has diminished, mainly due to the growing power of centralized due-diligence analytical teams, greater innovation with products such as separately managed accounts and exchange-traded funds, and changing needs of investors, according to a recent FRC report, "Reinventing Distribution: Aligning Wholesaling Initiatives With Corporate Goals." FRC interviewed 17 senior asset managers who rely primarily on financial advisers to distribute their products. Forty-five percent of the firms had over $100 billion in retail assets.

Brokerage firms are becoming more selective about the assest management firms they work with, and moving a product past due-diligence research teams is the first hurdle. Due-diligence teams consist of a group of analysts who analyze the underlying fund and make a decision to sell the product on the companies' platform or not. They are essentially gatekeepers, and "were not in the equation five years ago," said Bathon.

"Wholesalers need to sit with a due-diligence team and speak specifically and convincingly about product investment performance and value-added [services]," said Jeffrey Ptak, an analyst with Morningstar in Chicago. As a result, wholesalers need to be more sophisticated than they have in the past, he said.

"Wholesalers used to influence sales, but now they support sales. There has been a huge shift in the value the wholesaler provides," said Dennis Gallant, founder of Sherborn, Mass.-based Gallant Distribution Consulting.

New wholesaling models must be individualized to each firm, and there isn't a unified best approach for everyone, according to the FRC study. Wholesalers need to evaluate each firm and understand what drives change, whether it is financial pressure, external pressure, diminishing returns on wholesaling or a disconnect between a firm's approach to investment management and its approach to distribution.

Moreover, fund companies need to understand their clients and target audience, being careful not to treat them as an indistinct group. "Firms need to be more in tune with target marketing, and that will help with sales and marketing efforts as well," Bathon said.

However, fund companies face the challenge of complacent executives who are reluctant to change. "Executive teams need to hear a compelling argument to convince them to change strategies," Bathon said. Once the decision has been made, changes and new strategies may take around three years to implement, depending on the firm.

The firm needs to have a verified commitment to change and be clear about who is initiating and driving the decisions. Additionally, the risks associated with change need to be evaluated. The company needs to decide if the changes will be implemented on a firm-wide or on an experimental basis.

The study examined five firms that successfully implemented new distribution models. One firm shifted its focus to the gatekeepers and due-diligence analysts who oversee the platforms and had only four wholesalers instead of five. The model cost less and did not require one-on-one selling by wholesalers.

Another strategy that proved successful was building a distribution organization from the ground up. The company hired a top asset manager, replaced its traditional wholesalers with hybrids, who were a mix between external and internal wholesalers, and narrowed the types of financial advisers it pursued. The re-organization resulted in lower costs and rapidly increased sales.

Another firm hired wholesalers it thought had the right skills and attitudes to help move its business forward, with a critical requirement that they be technology savvy. Proficiency in both the firm's in-house systems and those of its target distributors became a core competency and a key differentiator.

To ensure that new strategies will work, firms need commitment from all employees in seeing the plan through. If the new plan doesn't work, sales managers or wholesalers must be encouraged to continue, rather than allowed to fall back on their old ways.

Transitioning into new distribution ways is not easy, and things can go wrong. Firms need to avoid the pitfalls of fluctuating priorities and reluctance to terminate staff. If an employee is not committed to the change, they need to be convinced to go along with the process or face getting fired. A company in transition might seek to revamp it's hiring criteria and hire employees with different mindsets than they would five years ago.

"There is going to be a major transition over the next decade. The industry is shifting, and advisers and consumers are emphasizing different needs. Asset managers need to be aligned and are becoming more institutionalized, objective and quantitative," Gallant said.

"Asset managers are working hard to become true partners with their distributors [and offer products] based on a better understanding of their needs," said Lee Kowarski, a principal with kasina of New York.

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