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Going Global? Think Local

MIAMI-The economy may be going global, but it's not quite business-without-borders yet, according to panelists at The National Investment Company Service Association's 25th Anniversary Annual Conference & Expo here last week.

"You can't underestimate the value of culture in understanding the mindset of the market you are in," said Richard DiDio, managing director of international investments at Newark, N.J.-based Prudential Financial. That goes both for selling products and sending tasks overseas, panelists agreed.

When it comes to marketing funds in other countries, one of the primary challenges is navigating the local regulatory framework, DiDio said.

South Korea, for example, offers an attractive marketplace, as it has numerous high-net-worth investors, is the world's 10th-largest economy and has a broken pension system that has many middle-aged Koreans looking for new ways to make their money grow.

But establishing a presence there was not easy for Prudential. Protectionist regulators are still determining how to deal with new interest from foreign financial companies and products. The Korean government imposes a 15% capital gains tax on investments based anywhere else, in an effort to help build the local economy.

"If you go into this space and only sell offshore [products], you're at a disadvantage," DiDio said. As a result, Prudential sometimes creates local funds, which U.S. managers sub-advise.

When it comes to distribution, it is critical for companies to understand where investors in those countries turn for help.

In Korea, as in Europe, banks are the primary sales channel. So while non-Korean institutions may partner with local banks, the problem is figuring out how to distinguish your company's product from the competition, he said.

"The problem then becomes, how do you get these assets with the clients out of the bank and into your firm," he said. It means understanding local investors' needs. "You've got to have a local presence," he said.

Prudential has done that through acquisitions. In order to differentiate itself from the pack, Prudential offers services, such as cash management, bill pay and direct deposit. Traditionally, Korean investors' biggest appetite has been for fixed-income products, but offering advice among its services helps whet the local palate for equity-based and other types of investments.

In Europe, despite talk that the European Union would open one seamless marketplace-one that would be second in size only to that of the United States-regulatory, sales and technological frameworks remain disparate.

"That dream hasn't quite happened," said Angela Billick, a sales and relationship manager for institutional investors at BNP Paribas. "The European passport is not going to happen overnight."

That's because, although there are some EU-wide standards, each country still interprets those standards differently. "Compliance, in a word, is difficult," she said.

Cross-country trades are cumbersome, often involving faxes and other relatively inefficient communication systems, because computer programs in different jurisdictions are unable to transmit data in a uniform manner.

Choosing a transfer agent that can adapt to the recordkeeping requirements of each country can be a challenge. Sometimes, fund companies must use different services providers in each.

"The asset manager needs to be clear about what they're getting and what they're not," Billick said. She recommended fund companies maintain one standard, and that it be the one that can satisfy the most rigorous of the jurisdictions in which they sell.

Investors in each country, likewise, have their own culture. In France, for example, investors have a huge bias toward local funds. In fact, 80% of all shareholders have bought local funds, down from 99% a few years ago. As a result, companies that want to break into the market often ink sub-advisory relationships with local banks.

Because banks dominate distribution in Europe, financial companies must not only get on these platforms, but somehow garner the attention of investors. Again, such relationships with the bank must be carefully negotiated and then communicated to investors. "Really, really take the time to look at who are their providers and who are their lawyers," she said.

"We need to walk that fine line with our clients so they know what [the bank] is responsible for and what we are not," said Billick. "At the end of the day, the provider is the fiduciary."

Billick's advice, therefore, is not to try to sell throughout all of Europe, but to choose a strategic handful of jurisdictions, build relationships and get people on the ground to build brand recognition.

When it comes to outsourcing internal functions, navigating cultural differences is critical to success and loyalty, said Joseph M. Connors, president for mutual fund distribution at GE Asset Management.

"To deliver productivity and cost efficiency, you really have to use the world workforce," Connors said.