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Funds Must Get Technologically With it': Even Google Could One Day Compete for Investors


PALM DESERT, Calif.-Technology can be used as a leverage to help mutual fund firms better understand and reach their clients, agreed panelists at the Investment Company Institute's, "Mutual Funds and Investment Management Conference" here last month.

If they don't, fund companies will find the unlikeliest of competitors creeping up on them.

"One day, Google is going to be a competitor to the industry," ventured Paul David Schaeffer, managing director of strategy and innovation at Oaks, Pa.-based SEI Investments.

"The industry is under-spending on technology and innovation," Schaeffer warned. However, mutual fund firms are beginning to recognize this, and, as a result, 60% expect to spend more money on technology this year over last year, he said.

Technology certainly changes how fund companies interact with clients. With the right technology in place, it can help them understand what clients want, Schaeffer said. Embracing technology innovation will be key to delivering a differentiated client experience, he stressed.

The client experience has to be personal and innovative; tools such as blogs, webcasts and podcasts could be useful outlets to meaningfully reach out to customers, Schaeffer suggested. But in using these tools, companies must first understand customer motivations, he said.

Public policy will continue to shape the investment management industry, Schaeffer added. The politicization of asset management continues due to pension reform, accounting changes, growth of the investor class and wealth creation and transfer, he said.

Product evolution will continue in the industry and will determine if companies succeed in the future, panelists agreed.

There are many products yet to be conceived. To date, the industry has been busy pushing around old constructs from years ago when the world was a different place, Schaeffer said.

Now, the industry is moving away from benchmarks and performance. The challenge is knowing the end client and what to develop from a product manufacturer point of view, he said.

The shift to open architecture will expand shelf space and product offerings, said Darlene DeRemer, a partner with Grail Partners of Boston, a merchant bank that specializes in the investment management industry. A lot of products will be developed to help the 77 million Baby Boomers plan for the distribution phase of their retirement, she said.

Companies need to strategize to determine what areas of business they want to have a presence in, DeRemer continued. It might not make sense to offer all products on the company platform, she said. Each product has to be targeted to the right customer, as well.

The landscape is becoming more competitive as alternative products continue to come to market. Closed-end funds, securitized commodities, exchange-traded funds and hedge funds are a few alternatives to mutual funds. Yet, all of these products should be viewed as belonging to the same industry, Schaeffer said.

"We tend to think of the asset management industry as a complex, segmented collection of businesses, but it's really all one business," he said. The asset management business is evolving and investment managers "need to think beyond the asset management industry of individual silos," Schaeffer added.

Investors like integrated, multifaceted products because they add exposure to specific asset classes, markets and strategies, said Joanne Medero, global head of government relations at Barclays Global Investors of San Francisco. They can also provide for lower investment expenses or higher returns for higher fees.

Also, these products have less rigid marketing and disclosure rules than mutual funds, Medero noted. The time for them to arrive to market is faster and innovation is rewarded, she added.

The industry continues to offer a much richer set of options then what was available five years ago, and investors are looking for different solutions, Schaeffer added.

One example is that ETFs have grown at a significant pace in the last six years. By 2010, ETFs could reach $1 trillion from the current $430 billion, DeRemer said.

Additionally, there are a few major players in the industry, but companies' assets and market share are becoming less important. Size helps, but boutiques will always exist, as they "have a nimbleness in the market," Medero said.

"Any firm with a consistently strong performance will succeed," said Thomas Lemke, senior vice president and general counsel at Legg Mason Funds Management of Baltimore. Larger firms may even have a more difficult task because investors expect them to offer a broad range of products, he said.

"You don't have to be a Blockbuster to remain in business," Schaeffer said.

Globalization of the industry is also expected to happen at a larger scale, panelists noted. Firms based outside of the U.S. will, most likely, become larger then U.S. firms, presenting a challenge to regulators, DeRemer said.

"It is a global marketplace, especially for large institutional investors," Medero said. However, non-U.S. investors are still seeking exposure to the U.S. markets because they want the innovation and strategy of U.S. asset managers, she commented.

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