Why Fund Firms Need a Chief Distribution Officer Now
July 16, 2007
In his 2004 biography of Alexander Hamilton, author Ron Chernow noted that a large part of Hamilton's genius was to erect structures virtually assuring that the nation would grow up with a strong centralized government.
As the primary author of the Federalist Papers and the country's first Treasury secretary, Hamilton realized that the structure of an organization dictates its goals and performance. This fundamental insight has broad applicability in today's asset management business, where marketing and distribution operations often fail to act in concert.
For many firms, this is a structural challenge, and one that must be addressed if they are to maximize their impact in the marketplace.
An Artifact of History
Firms have generally been responsive in creating new lines of authority to address major shifts in the asset management industry. Until the 1980s, chief executive officers often oversaw individual funds as well as the other major areas of the business: operations, human resources, sales and marketing. As these businesses grew, management began to create more specialized positions, including chief investment officer (a reaction to the growing complexity of the markets and the increasing number of product offerings) and chief compliance officer (in part an effort to address the demands of Sarbanes-Oxley).
As these new functions have evolved, distribution has remained something of an organizational orphan, an artifact of history. Two structures presently exist, each with its own problems. In one instance, distribution oversight is dispersed and marketing is separated from sales and national accounts. As a result, there is no single point of executive oversight to ensure that all three disciplines work together effectively. In the other, the chief executive officer maintains responsibility for distribution, with the three primary components reporting to him or her, but, oftentimes, the CEO is simply too stretched to oversee the function effectively.
Both of these structures clearly compromise the ability of the organization to compete effectively for assets. This issue is not unique to the asset management industry. In fact, research has shown that about 25% of all business-to-business distribution resources are typically wasted due to the prevailing inefficiencies.
Marketing fares even worse, with up to 90% of the content produced by companies' marketing departments viewed as useless by salespeople, and 97% of the campaigns irrelevant to the customers the salesperson is trying to attract.
While many firms at least have meetings among the senior managers responsible for sales, marketing and national accounts, few have done much to hardwire communications across these departments. Simply paying lip service to the advisability of "better communications" is not enough. Rather, the answer is a new distribution structure featuring a senior role, or chief distribution officer, focused on ensuring alignment across sales, marketing and national accounts.
As with Hamilton's early maneuvering, creating a chief distribution officer effectively realigns the organization with a single stroke, unifying responsibility and eliminating the structural impediments to better communication. In this new role, the CDO can really take charge, setting clear distribution goals across sales, marketing and national accounts, and bringing the organizational clout to make sure these groups work together toward a set of common goals. The alignment thus becomes hardwired, allowing management to measure and compensate against it.
Every firm will locate the CDO somewhat differently within its organization chart, depending on the number of product channels in which it distributes. For those operating in a single channel, sales, marketing and national accounts would simply report directly to the CDO, who in turn would answer to the CEO. For firms with more complex distribution structures, operating in multiple channels, this organizational matrix would essentially be applied to each channel, with the CDO role as head of distribution reporting to a channel "CEO." Both represent a significant advance over current practice.
In the first half of the twentieth century, modernist architects established the idea that "form follows function." They believed that the shape of the buildings they designed should be derived from the intended purpose.
A similar principle can be applied to asset managers seeking to foster dialogue among the components that make up sales and marketing: the structure of distribution organization should be designed to compel the desired interaction. Establishing a chief distribution officer, and putting in place the infrastructure required to support the position, is an excellent first step in that direction.
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