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Distributors' Demands Pose Challenges for Small Funds

WASHINGTON-As the home office absorbs more of the functions formerly handled by financial advisers in the field, gatekeepers at these broker/dealers increasingly look for products that offer the total package: capacity, price, style, innovation and product support.

For smaller fund companies looking to get on large platforms, this move toward institutional-style services may be a mixed blessing.

"Unique ideas, brilliant managers, brilliant insights, we'll take them all," said Robert Boyda, senior vice president for investment management services at Boston-based John Hancock Financial Services during a panel presentation at the Investment Company Institute's 49th Annual General Membership Meeting earlier this month.

But actually getting onto the platform takes a little more than sheer brainpower. Gatekeepers want products to come with services on a scale that might be harder for smaller shops than behemoths.

A few years ago, B/D home offices were more focused on conducting due diligence, examining the funds on their platform and their managers. But increasingly, they have taken on functions such as asset allocation, manager and fund selection, portfolio construction, and reallocation or rebalancing.

Advisers, meanwhile, have adapted their focus to fit the needs of their Baby Boomer clientele, replacing those roles with things like estate planning, income planning, education planning and debt management strategies, said Keith Harstein, president and chief executive of John Hancock Funds.

The good news for small fund companies is that when it comes to picking products to add to the platform, brand name counts less.

"We're looking for investment capacity, fees, style," Boyda said. "The door-opener in our world is the exotic."

"The appetite of the intermediaries is for unique solutions," said Nicholas Stuller, president of Shrewsbury, N.J.-based Discovery Database, which provides databases of advisers and B/Ds to fund companies.

The bad news for small funds is that whatever their niche may be, they need to be able to package it in a way that can be sold to advisers as a ready-made solution, not part of a tool. That may be where larger companies have an advantage.

John Hancock prefers funds that consistently offer a strategic advantage and can be used across products, such as 401(k)s, 529s and separately managed accounts. At Smith Barney, advisers increasingly prefer products that can deliver clients a single Form 1099 at tax time, which means companies that can provide unified managed accounts might get more attention than those that don't, said Marc Brookman, director of program management and development at that New York-based firm.

Smith Barney advisers also seek access to alternative and wrap products of bundled exchange-traded funds, Brookman said. Fixed-income products are especially important, since 40% of the firm's assets are already in that class. Offering different share classes could also prove a deciding factor.

"At our firm, research drives everything," he said. Decisions are based on everything from the contents of the portfolio to the type of disclosures the portfolio manager offers, he said.

Columbia Management also seeks product support from portfolio managers, said Beth Brown, managing director and head of strategic partnering at the Boston-based company. White papers, or quarterly outlook pieces are a valuable service, she said.

"You have to make sure you can get your portfolio managers-someone who can talk the talk-to speak to the gatekeeper at the brokerage firm," Stuller said. "It's a little bit of an uphill battle, but as long as the fund company is aware of that, there can be a deeper education of the gatekeeper."

For small fund companies, trying to stretch tight marketing budgets also means making sure they know who the gatekeepers truly are, and what they seek.

"First work the system," Boyda said. That means approaching everyone from the sales teams interested in pushing a new product and product managers, all the way through internal and external consultants, and up to the executives and board of independent trustees.

"Know the organization, which markets they compete in, what the products on the platform look like," Boyda advised.

If a small fund company can address all of these issues, one question remains: Can they handle the flows?

"I don't think there's any bias against small funds other than capacity," said Raymond James Mutual Fund and Marketing Director Andrew Gotfried.

Boyda agreed that brokerages often place big amounts of money at once. Funds need to be able to accept a billion dollars with aplomb.

Stuller has seen enterprising marketers approach two or three investment companies that have complementary asset classes or products, and offer to represent them as a group in a sum-is-greater-than-the-parts approach.

Such models not only offer several unique or distinctive strategies to gatekeepers, but also help diffuse asset managers' costs and make it easier for them to accept large sums at once.

"The worst thing you could do is give performance, but not be able to support the product," Brown said.

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