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As Wholesalers Wane, Fund Fit' is Key


NEW YORK-The process of selecting mutual funds is changing as wholesalers' clout diminishes, according to panel members who spoke at a National Investment Company Service Association seminar for distribution executives here last week.

Best practices for adjusting to the changing distribution landscape and getting past gatekeepers were noted, as distribution experts made suggestions about how to navigate in the new environment.

As traditional salespeople become less important to brokers and advisers in selecting funds, distribution executives must adjust their strategies.

In addition, there are some areas where the gatekeeper role is actually being played by different entities, not the relationship manager at a broker/dealer.

"You have to use a different approach for some of the traditional gatekeepers. In some cases, you have to go around them," said Scott Garsson, vice president of product and channel strategy at JPMorgan Funds Management.

As gatekeeping becomes more institutionalized, distribution strategies are changing. In a world of about 550 mutual fund companies, it is essential for asset managers to make sure their funds maintain visibility.

But that doesn't mean inventing new products in response merely to the direction in which assets are flowing.

"We don't except managers to change their approach," said Jeff McConnell, a senior investment consultant at Morningstar.

He noted that because no asset manager does everything well, brokerage sponsors should pick and choose when constructing their portfolio of offerings. It can be appropriate to have a mix of well-known names and boutique offerings.

The best strategy in developing new products will be the one that is consistent with an asset manager's investment management strengths. For example, not all strategies are suitable for an exchange-traded fund, although many are launched each month.

Nor should fund executives design offerings just to conform to a box in the Morningstar stylebox. Participants described the recent onslaught of 130/30 funds as an example of some asset managers aiming too broadly because a category is perceived to be "hot."

Preferred List Status

Only the Start

While getting a company's funds on a brokerage's preferred list is the common goal, it can be approached from a number of perspectives.

Michael Dowhan, director of institutional business development at Morningstar, said there are various ways for fund companies to achieve maximum distribution. Some take a quantitative approach by reverse engineering a platform and assess how their funds fit in. Others take a more qualitative approach and attempt to fit their fund offerings to a target audience.

Another approach recommended by panel participants is that fund companies attempt to leverage what they do well across new categories of products.

Jeremy Held, director, product distribution at Alps Fund Services, said that the best broker/dealers and registered representatives have a clear idea of who they are serving, and fund companies can use this information to tailor their offerings to them.

Brokerages "know if they specialize in, for example, high-net-worth individuals at certain income levels. Fund companies should package their offerings toward this specific audience," Held said.

He added that asset managers should shift their thinking from products to solutions. Noting that the marketplace is moving toward best-of-breed, open-architecture choices, he emphasized that gatekeepers will pick the best provider in each asset class.

Panel members agreed that sometimes the choice of funds that a broker makes can be surprising. Speakers said that it is no longer as simple as picking a five-star fund over more lowly ranked offerings. What matters is how the products fit together and complement each other.

McConnell said fund providers should avoid surprising partners with problems like capacity constraints and changes in fund managers.

He ticked off style drift as another problem that can jeopardize funds remaining on preferred lists. "You should keep consultants and advisers in the loop if things are changing. There may be a good reason for these changes, but it should be communicated," McConnell said.

Garsson said that the more wholesalers are institutionalized, the more important research becomes. Fund salespeople must emphasize the unique characteristics of each product or solution.

Among other changes mentioned by panelists is that fund companies must now support not only direct wholesalers, but also national accounts.

As a result, fund companies' relationships come more to resemble a consulting process than live sales.

An additional function that is expected to increase in importance as wholesalers' influence shrinks is a thorough due-diligence process.

Although much of the efforts of asset managers are directed toward getting on gatekeeper's primary lists, Dowhan cautioned that this is only the beginning of the process. Getting on a brokerage's preferred list will not in itself drive shareholder dollars into the vehicle, Dowhan said. It is still necessary to promote the identity of the fund.

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