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Internet Opens up Vast Product Arrays: Fund Firms Urged to Expand Consumer Choices

WASHINGTON-The financial industry should pay close attention to what consumers are saying about it and look for niche product opportunities, according to Chris Anderson, editor-in-chief of Wired magazine and author of the book "The Long Tail: Why the Future of Business is Selling Less of More" (Hyperion Books, 2006).

The long-tail theory is that the American culture and economy are moving away from a focus on "blockbuster" hits and trending toward niche markets, Anderson explained, speaking last week here at the Investment Company Institute's 49th Annual General Membership Meeting, "Mutual Funds: Enduring Value For Investors."

The basic rule of the long-tail theory is if you can lower distribution costs, you can offer more products, and if you offer more products, consumers will buy them, Anderson said.

Distribution costs are falling, especially online, making it possible for companies to offer a wealth of choices to a wide array of consumers. Up until now, American businesses have focused on certain target markets and offered only a few products, he said.

"There is life beyond the blockbuster," Anderson said. In fact, blockbusters are becoming less of a success and harder to predict, he added. Consumers have more and more choices available to them in every aspect of their life.

For example, today the average household has over 100 television channels available for viewing. Viewership of the top 10 shows has declined because the TV industry has become very fragmented and consumers have a choice between a wide variety of niche channels, he said.

Financial firms should launch their own versions of niche, cable TV channels, Anderson said. He gave the example that Budweiser now offers a gluten-free beer that is very popular. The demand for a gluten-free beer has probably always existed, but the ability to implement it was hard because of distribution channels, he said.

Power of the People

Also, power and influence over what the market offers in various industries is shifting from company executives to the consumer, Anderson maintained. Information power is replacing brand power because consumers now have the ability to share information with one another instantly and broadly through the Internet, he said. After reading reviews of products online, consumers are less likely to pay a premium for a product, when they can buy a similar product that works just as well.

Anderson recognizes that the long-tail theory can be harder to apply to financial services companies, as the large firms have been gaining greater market share and influence over the financial services market since the bear market of 2000-2002. A lot of the theory's success depends on trust, and after 2000 many investors aren't feeling brave enough to invest with small companies, he said.

Some niche fund companies need help getting their story told and have little brand recognition, said Jim Nolan, executive vice president for fund services at BISYS Fund Services, speaking after the conference. However, they can offer access to portfolio managers, and that helps build trust, he said.

As 77 million Baby Boomers start to retire, Michael Evans, president of Financial Research Corp. of Boston, sees boutique managers having opportunities in the 401(k) space if they "have the right product and the right sensitivity."

Also, at the "upper end of the market, there is a movement toward managed accounts," Evans explained, and this is an opportunity for tail-end, boutique companies to make money with niche products, he said.

Most markets do not sell the right products, Anderson said, but the financial industry is different. Most companies are on track in terms of selling the right products, but few market them correctly.

Tap Into the Pipeline

For example, in terms of reaching the 70 million Generation Y'ers, individuals born between 1979 and 1994 who grew up in an Internet era thinking everything you need to know you can find on Google, Anderson advised companies to listen to what they are talking about with each other. Tap into the needs of this age group, he suggested. Find out what influences them.

Anderson advised financial firms against creating Myspace or Facebook pages because people most likely wouldn't look at them. However, they might be useful sites to browse to find out what people are talking about.

Word-of-mouth marketing is becoming more and more important, he continued. How well a movie performs the second weekend depends on moviegoers telling their peers if the movie is worth seeing or not. Big-name celebrities, special effects and traditional advertising are losing their effect on people, he said.

Anderson noted that no amount of marketing or advertising can stop what people are going to say about companies and products, he said. People talk about good and bad qualities in companies and they can tear you down or build you up, he said.

This is the same for the financial industry, so influence the influencers, he advised. Listening to what people are talking about is very important. If companies are selling products and not finding out what bloggers are saying about them, then companies cannot even begin to know where to reach people, he said.

Blogs are growing in popularity at a fast pace, and it seems to be the new way people are communicating and finding out information. Each person has their own very specific, granular interests that blogs tap into, Anderson said, as he noted he likes to read LEGO robotic blogs with his kids.

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