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Results, Service Trump Exotic Products: Mutual Funds Expected to Continue Their Rule'

WASHINGTON-Investment companies interested in capturing more market share should not worry so much about new products, such as separately managed accounts, exchange-traded funds, or even funds mimicking alternative investments.

Tried-and-true fund structures work just fine.

"Mutual funds rule," Chip Roame, managing principal at Tiburon Strategic Advisors in Tiburon, Calif., told attendees at the Investment Company Institute's 49th Annual General Membership Meeting here earlier this month.

And funds will continue to rule despite the proliferation of competing products for one simple reason: independent registered advisers like them.

What's more, while captive brokers and retail banks once directed sales for as much as 58% of investible assets, independent representatives and fee-based financial advisers are gaining ground, Roame said.

In fact, between 1995 and 2006, the client assets for fee-based advisers grew 18%, while those of independent representatives increased 11%. Wirehouses and direct-sale discount brokerages, on the other hand, saw asset growth of 11% and 9%, respectively. Bank client assets grew only 3%.

Much of that movement is driven by Baby Boomers who, when rolling their assets out of employee retirement plans and turning other assets, such as real estate or ownership of a small business, into cash, often look for someone to help them park it.

"Your business is all about the Baby Boomers for the next 20 years," Roame said.

It's big money, too. Investible assets represent a $19.8 trillion marketplace, while retirement plan rollovers add another $7.5 trillion. Selling the family house and that mom-and-pop shop is expected to pump another $9.6 trillion or so into the marketplace over the next several years, according to Tiburon research.

Roame had another rumor to dispel: high-net-worth investors-that segment all advisers long to tap-like plain-old mutual funds, too. "Rich people buy mutual funds," he said.

And Boomers seek security over investment process.

"You develop all the wrong products if you don't understand American wealth," he said. Many companies fall into that trap because they focus on building products that chase trends, he said, rather than sticking to core competencies.

ETFs are one example of production gone wild. "If you look at what's in registration right now, it's ludicrous the number of ETFs," Roame said. For companies hoping to play catch up, the flows these products will attract might not make them worthwhile. "Sixty percent of flows are still going to go to Barclays," he said.

At the other end of the tug-of-war between alpha and indexing, the emergence of registered products that mimic alternative investments, such as 130/30 funds, may be interesting to advisers, but they are not necessarily useful.

"We look at them, but we don't use them," said Michael Freiman, a senior investment management consultant with Smith Barney whose staff of nine manages $700 million for high-net-worth clients and a peppering of institutions and endowments. "They are not yet tested," he said.

The same goes for separately managed accounts (SMAs). SMAs don't always make good economic sense to the advisers, said Thomas Skrobe, managing director for product development and management at BlackRock. "There is more work, more people, and the margins are tight," he said.

Freiman and Skrobe also emphasized the danger of products that appear expensive. "We manage fees methodologically," Skrobe said. "We want to be at or below the median," he said, using Lipper and Morningstar indexes as the benchmark.

"We don't want anyone to look at us and question why we are doing things," said Freiman. His clients get a report showing expenses in dollars and cents, as well as percentages. Products that make fees just as transparent are important to him.

What advisers and investors alike want is advice, Skrobe noted. That makes products such as lifecycle funds, turnkey asset management programs and unified managed accounts attractive, he said.

The proof is in the growth of sales of such packaged products, Roame said. In 1992, packaged products like these were an $82 billion industry. Ten years later, they represented $800 billion in sales. Today, packaged products are a $1.5 trillion business.

While target-date and target-risk funds were once considered the realm of the defined benefit program, advisers are increasingly using them in taxable accounts, Roame said.

"As advisers, we go back to what we like," he said. That means strong, solid funds with good track records and programs that offer solutions and support.

For Boomer clients, the goal is long-term security over new strategy, and the means by which advisers achieve that are secondary.

"My clients come to me as a coach to develop a game plan," Freiman said. "My [clients] could care less about what's out there. They come in and say, Do this. Now let's go play golf.'"

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