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Do Asset Managers "Get" LinkedIn? Not Yet...

By Jesse Mark

With over 150 million users, LinkedIn is the largest professional networking site. But many firms previously dismissed LinkedIn as a job posting board favored by Human Resources to recruit and find potential candidates. The big question for e-business, marketing, and social media executives is whether LinkedIn provides value to departments outside of talent management.

American Century Investments recently released a study on financial professional social media adoption. The study revealed, among a sample of 300 advisors, that a LinkedIn Group was the most important social media offering an asset manager could provide to them. Pat Allen, Principal of Rock the Boat Marketing expressed skepticism about the results from that data point.

In the past two years, LinkedIn has made big changes to become more "social", providing valuable opportunities for brands to connect with customers and prospects (e.g. Group pages and Status Updates, a Products & Services tab). Advisors can interact directly with asset managers. Wholesalers can connect with advisors to share the firm's latest whitepapers and market commentaries. Unfortunately, few firms capitalize on the opportunities afforded by LinkedIn, and those that do take advantage of new capabilities are not seeing results. Just 20% of firms use the Products and Services tab to promote their firm and only a handful of asset managers have created LinkedIn groups for clients and prospects. The few firms that do have LinkedIn groups see little valuable engagement beyond self-promotional spammers. This is not a limitation of LinkedIn itself, but a result of many firms not prioritizing the platform.

WHAT ASSET MANAGERS AND INSURERS ARE DOING ON LINKEDIN

In our new whitepaper, Getting Results from Social Media: Leaders and Best Practices, we outline a number of strategies that firms can utilize to kick-start their LinkedIn presences. Just some of the many things firms can do to increase engagement on LinkedIn is to employ a community manager to spark debate and steer discussions with advisors. When the Group has reached a certain threshold, firms can benefit from actively encouraging clients and prospects to join the Group and further the dialogue. Additionally, experiences outside of the industry show that LinkedIn thrives when a firm’s employees are active and visible in industry groups.

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Alternatives: Think Before You Educate

By Hari Krishnaswami

Alternatives as an asset class are becoming more mainstream as advisors continue to seek performance from strategies outside the traditional style box. However, just because advisors use them does not mean they all have a strong grasp of the benefits. Why is this important? Because better understanding of these products leads to more business.

We recently completed our survey on alternatives exploring several questions - do advisors use alternatives? If so, which types of alternatives are they using? What is their level of understanding? What are the perceived benefits? What are their allocation plans over the next 12 months?

Breadth vs. Depth: RIAs allocate more but Independents have broader adoption.

Yes, a greater percentage of independents utilize alternatives in their portfolio than other channels - 26.5% of independent advisors use alternatives - however, when it comes to adoption, RIAs have the highest average allocation of 16.2%.

Not All Alternatives Are Created Equal

While REITs have the strongest level of understanding amongst alternatives, that isn't the case for others. When asked about currency funds, only about a quarter have a high understanding; even more have a low understanding. Hedge Funds are another type of product with a significant amount of advisors who have a low understanding. Although there are already many alternatives products, there is still a lot of work that needs to be done to get advisors to understand the benefits.

Lack of Understanding Means Lack of Clarity on Benefits

When we looked at the perceived benefits of alternatives against an advisor's level of understanding of that product, we found that those that had a low understanding typically had a different perception of the benefits. For instance, with Hedge Funds, nearly half of advisors who had a low understanding of them indicated that they have "no added value in my client portfolios". Conversely, a little over half of advisors who had a high understanding noted the primary benefit as "returns uncorrelated with major equity indexes".

Low Understanding Drives Advisors to Choose Products Differently

Advisors' anticipated allocations to alternatives were related to their understanding of the products. Two thirds of advisors had a high level of understanding of REITs and over a quarter planned to allocate more in the next 12 months. Conversely, only a quarter had a high level of understanding of Currency Funds, with less planning to allocate more in the next 12 months.

Key Takeaway: Think Before You Educate

Asset managers spend a lot of time and resources developing education for advisors. Are they focused on the right topics? Advisors are clearly hungry for more education with over 60% indicating they want education from asset managers - but consider whether they walk away with a better understanding of your products benefits, not just what's on the fact sheet.

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Segmentation is a Team Sport

By Rubesh Jacobs

My colleague, Helen Gurina, recently posted a blog piece on whether data analysts or wholesalers should conduct lead segmentation.

Interestingly, this question is a microcosm of the larger issue surrounding segmentation.

While executives agree intellectually about the importance and necessity for segmentation of advisors, two critical challenges to getting the effort off the ground are:

• Helping colleagues visualize and internalize the value of segmentation. Our newest paper, The Five Advisor Segments, helps paint a picture of what segmentation could mean for an organization.
• Overcoming the question whether distribution or marketing should own and manage segmentation.

I want to touch on the question of ownership.

Our paper outlines, at the most basic level, that segmentation is typically conducted in distribution where management decides which channels are important and wholesalers decide on A, B, and C advisors within their territories. There is some value-based segmentation and little, if any, behavior-based segmentation.

The perception in marketing is that they should own segmentation of advisors and port it over to their colleagues in distribution to improve prospecting and market share. This further perpetuates the perception that segmentation is just an exercise in data analytics.

In actuality, the conversation should be addressed at a more strategic level. Segmentation should not only help determine how to sell and market to advisors, but also how to service and grow the relationship with them. That is, segmentation should be embedded in the vision, DNA, and strategy of the firm. This implies that allfunctions within a firm play a role in providing the appropriate experience to each segment.

Creation of the segmentation strategy requires representatives from virtually every function and division to be on a Segmentation Working Group. This group will define objectives, design segmentation around those objectives, prepare blueprint of the effects of segmentation across the entire organization, and manage necessary changes that segmentation will demand of the organization.

Therefore, we suggest the department owning and driving the firm's overall strategy, whether it's a corporate strategy group, marketing, or in some cases, finance, should be accountable for the overall implementation. At the end of the day, advisors don't care who owns segmentation, whether it's strategic, or if firms segment or not. What matters to clients is that their needs are fulfilled. Firms should care because segmentation is more about allocating resources to high-yield opportunities and less about solely targeting or service.

All said, segmentation is a team sport

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2025: Wealth Management in the Internet Age

By Jesse Mark

At our Digital Marketing Summit last week Saadiah and Rubesh presented the keynote address, asking the audience to think about what the industry will look like in 2015. They touched on how new technologies can help firms interact and engage with financial advisors. Will voice-activated mobile apps answer advisors' product questions? Will firms host virtual conferences where advisors can mingle with PMs and peers?

These intriguing questions got me thinking tangentially because I think technology will fundamentally change the industry. Boomer's assets are in transition. They have already begun the lengthy process of decumulation. The future of the asset management industry will develop on the heels of the next generation of investors: the 20-, 30-, and 40-year olds. These tech-savvy investors think digital first. Consequently, the physical relationship with an investment professional is less important when you grow up in the digital age. Imagine video conferencing and e-communication as the norm in the advisor/investor relationship.

I think big changes are apt to materialize at large broker/dealers over the next decade. Margins are tight and even if distributors press for increased revenue sharing, that pool of revenue isn't going to increase dramatically as low cost index products continue to capture substantial flows. One avenue that broker/dealers may explore is outsourcing the non-relationship facet of the business. A number of new tech-startups like MarketRiders and PersonalCapital are providing evidence that investment strategy and risk management can become increasingly automated. These sites act like computerized advisors, investing in the appropriate asset allocation and automatically rebalancing over time (not a whole lot different than the meticulous process at some large distributors).

Broker/dealers outsourcing the investment strategy business would allow financial advisors to spend a much higher proportion of time with clients and prospecting to bring in new business. That's a win-win for both financial advisors and the home-office.

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Change is Coming. Are You Ready?

By Saadiah Freeman

How well does our industry understand the needs and priorities of investors? How well do asset managers and insurers differentiate themselves and deliver real value to their customers?

At the 2012 IRI Marketing Summit held earlier this week in New York, these two key questions arose time and again throughout the keynote speeches and panel discussions. And it appears that many firms realize that the answer to both questions is - not well enough. The events of 2008 revealed underlying concerns with conventional portfolio construction approaches, particularly the effectiveness of diversification, and dealt a severe blow to investor confidence and trust in financial advisors and asset managers. At the same time, today's investors are more empowered than ever before, as the Web and social media enable them to conduct their own research and connect online with other investors to share information and opinions. In addition, people are living longer and societal attitudes are changing, increasingly replacing the traditional model of 'retirement' (a period of rest after a lifetime of hard work) with a more flexible approach. According to a study conducted by SunAmerica and the AgeWave Institute, 54% of Americans view retirement as a whole new chapter of life, potentially including periods of work interspersed with periods of leisure, a new career, travel and education, and giving back to the community. With the baby boomer generation on the cusp of retirement, understanding the shifting dynamics of this phase of life will be a critical business imperative for firms over the next decade.

For asset managers and insurers, this changing landscape represents a challenge, but also an opportunity. Firms can position themselves for success in this environment by:

• Designing products that are tailored to investors' actual objectives and preferences, not to the objectives and preferences advisors or firms think investors ought to have. 58% of respondents in the SunAmerica study (referenced above) planned to look into alternative ways to protect their assets following the 2008 recession, whereas only 11% planned to invest more aggressively to make up for lost time. Yet many firms continue to focus their product development efforts on higher-risk strategies, despite evidence that many investors are wary of taking on more risk.
• Embracing the power of digital media to create personalized marketing strategies, build brand equity with clients, and deliver interactive tools to help advisors and investors plan effectively for new retirement concepts and pathways. kasina's FA Vision advisor research indicates that more advisors now prefer to communicate with asset managers using digital channels (email, Web and social media) than by phone or in person. Firms that neglect digital, risk losing business to competitors who recognize the need to be everywhere their customers are.
• Training the field sales force to understand new concepts of retirement and how the firm's products and services can help facilitate different retirement pathways, so they can effectively support advisors in planning for this key demographic segment. Wholesalers who demonstrate deep expertise and a partnership-oriented mindset will be critical to gaining - and keeping - advisors' trust in today's rapidly changing investment landscape.

With a wealth of information available online and products becoming increasingly commoditized, firms that deliver unique, consultative and genuinely valuable client experiences will secure an important competitive edge. By adapting their strategies to address their customers' evolving needs and expectations, asset managers and insurers can transform change into opportunity, rather than being left behind in its wake.

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Implementing Lead Segmentation: Best Done by Wholesalers or Data Analysts?

By Helen Gurina

At the recent kasina National Sales Manager roundtable, both segmentation of advisors and the evolving role of wholesalers arose repeatedly as points of discussions. Though the advantages of using data to identify opportunities are increasingly understood and desired, according to kasina's 2011 Excellence in Distribution report, more than 60% of the firms still leave account planning primarily to the wholesaler.

The challenge is balancing both wholesaler-driven and data-driven approaches instead of defaulting to one. A thoughtful balance would take advantage of the approaches' respective benefits, some of which include:

Wholesaler

• Know more nuances about their territories and active relationships than data can capture


• Can read advisors' personal preferences and understand their plans beyond the models


• Knows when a sale can be made or not beyond statistical probability


• Fluid approach to the territory that can identify nearby low hanging fruit

Segmenting with Data

• Unbiased targeting of most valuable opportunities based on consistent criteria


• Incorporates firm, national sales and marketing priorities in selecting targets


• Includes activity in sales and digital interactions to evaluate leads


• Systematic approach to the territory to make sure pockets of value are not overlooked

Most firms can benefit from implementing rigorous data-driven analysis by the marketing team, as it is currently under utilized or not implemented at all. However, in doing so marketing should cooperate with sales to demonstrate the value of the approach and to generate active buy in to the process from the wholesaling force which will be feeding it crucial data. At kasina we believe in an intelligent approach to segmentation, where rigorous data analysis incorporates on-the-ground local knowledge obtained from the field wholesaling force. If the sales team provides input at every step of the model's creation, there should be no reason they still "know better" when their input is captured and enhanced. Some methods to bring this hybrid approach to fruition include:

• Designing easy digital interactions for mobile devices (ie iPads and BlackBerries) that would allow wholesalers to vet and contribute data to the analysis
• Lead segmentation by marketing or a vendor based on a data-driven analysis to help sales best serve their territories
• Incorporating an element of flexibility into the process for wholesalers to remove or add clients in the model based on their own knowledge, instead of working around the model
• Accountability from the wholesaler for generating the most current data and playing an active part in representing their territory's opportunities
• Integrating the leads generated by analysis with the wholesaler's active opportunity pool instead of tagging on a new application to check for additional leads. The goal is to create one seamless process that is less time consuming than the traditional means.

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In Search of Alpha

By Larry Petrone

In a paper entitled "On The Size of the Active Management Industry", authors Lubos Pastor and Robert Stambaugh argue that a fund manager’s ability to outperform their respective passive benchmarks decreases as the industry grows. As a result, they conclude that the large size of the active management faces decreasing returns to scale and that most fund categories with significant competition will fail to not only consistently provide alpha, but will generally fail to replicate market beta as measured by common indices such as the S&P 500 Index or the Russell 3000 Index. They go on to add that the growth of indexed funds and passive ETFs over the last 20 years has certainly reduced the share of actively managed funds, but the current sheer size of most actively managed fund categories continues to make it very difficult for active managers to consistently outperform passive benchmarks.

Indeed, the industry has known for quite some time about the informational efficiency of markets, beginning with the pioneering work by Professor Eugene Fama at the University of Chicago in the 1960's. Professor Fama argued that security prices consistently reflected all publicly available information and some insider information. While some research in behavioral finance has since revealed some imperfections in his theory, most industry academics accept some form of micro or security-specific efficiency and most believe the macro markets display some form of informational efficiency as well. That theory can easily be extended to the number of fund managers seeking to generate excess returns - the larger the scale of the active industry, the more likely returns will suffer.

What are the key takeways for investors and fund industry? The authors argue for continued expectations for underperformance by most fund categories with scale until the number of funds is significantly reduced. Moreover, they claim that since investors are slow to understand the concept of returns to scale, the size of the active management industry will continue to remain large for most fund categories for quite some time. We fully agree with their conclusions, and would add that certain segments of the industry are largely dominated by actively managed funds and will continue to remain so for the foreseeable future. For starters, most domestic long-only funds typically trail their benchmarks on an annual basis. For example, over the last five years, between 70% and 79% of the 150 or so large-cap funds trailed the S&P 500 Index. Moreover, while passive investing has grown in popularity among investors (based on data provided by the Investment Company Institute and illustrated in exhibit above), the year-to-year increases have been steady but slow. Finally, among the $4.5 trillion in assets held by defined contribution plans at year-end 2011, almost 90% is held in actively managed funds.

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Ensuring Effective Divisional Sales Managers

By Lee Kowarski

At kasina's National Sales Manager Roundtable last week, one of the most heated discussions was about the role of divisional sales managers. As I wrote in a blog post 18 months ago, the most effective wholesalers are not always the most effective managers, and the NSMs at our Roundtable had all experienced this issue first hand. Throughout the discussion, several questions arose that a firm must answer in order to get the most out of its divisionals:

What are the characteristics of a great divisional?

• While there is agreement in the industry that effective divisionals need a strong background in wholesaling, this does not mean that a divisional needs to be a "top" wholesaler. In fact, many firms have found that star wholesalers often do not make the best divisional, just as star athletes typically do not make the best coaches (see Gretsky, Wayne or Thomas, Isiah). Two of the most desirable traits for a potential divisional are a desire to be a manager and demonstrated effectiveness as a manager.

How should divisionals spend their time?

• Divisionals are typically asked to travel with wholesalers, hire for open territories, review expense reports, open doors for their wholesalers by building relationships with distributors' regional personnel, and much more. At some firms, divisionals also meet with key advisors and present at important meetings (often because they miss wholesaling, not because this is a desired role for the divisional). It is crucial that firms have a shared understanding of the role of, and priorities for, divisional sales managers. While the specifics can vary depending on the firm, the role needs to be consciously defined and measured so that the right people can be hired, expectations can be aligned, and the appropriate number of wholesalers can be assigned to each divisional.

What training is provided to divisionals?

• Most firms provide new divisional sales managers with extremely limited training. What training is offered often focuses on systems and processes (e.g. reviewing expense reports). For divisionals new to this role, it is critical to include training how to effectively coach and provide feedback, as well as expectations for the divisional and their wholesalers. They need to be taught how to assess and develop their wholesalers and how to effectively get buy-in from their team without undercutting "management". Even experienced divisionals are likely to benefit from this type of training when joining a firm, as well as on an ongoing basis.

How does the National Sales Manager work with divisionals?

• With all of the myriad activities a National Sales Manager (NSM) is tasked with, it is rare that an NSM gets to spend a sufficient amount of time working with his or her divisional sales managers. Given the large investment firms make in their wholesaling forces and the huge impact a divisional sales manager can make on wholesalers (either positively or negatively), NSMs should commit time to developing their divisionals. If a firm is effective at identifying and training impactful divisionals, retention soon becomes a critical issue - one that NSMs can help address by spending time with their divisionals

The 2012 update of our annual report on external wholesaling will include more details about the evolution of divisional sales management. Surveys for this research are going out this week to sales management across the industry. If you are interested in participating, please contact your relationship manager at kasina or e-mail research@kasina.com.

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Distributor Margins Down Despite Bullish Fourth Quarter

By Jesse Mark & Gordon Chen

Despite lingering global economic uncertainty, markets rebounded in the fourth quarter of 2011. The Dow Jones Total U.S. Stock Index posted an increase of nearly 11.5% during the period, and total assets under management in U.S. open-ended mutual funds increased by 6% to $8.0 trillion. Net flows during this last quarter were slightly negative but had a negligible effect on assets.

But recent market gains have translated into mixed results for asset managers. Based on the earnings results from publicly-traded firms, kasina found that industry operating margins decreased from 32.2% in Q3 to 31.2% in Q4, while net margins rose from 20.1% to 23.1%. Both operating and net margins remain virtually unchanged from figures a year ago.

ASSET MANAGER PROFIT MARGINS

The decline in operating margins can be attributed in part to a fundamental shift in investor asset allocation which continued in the fourth quarter. During this period, total flows reached over $122 billion as investors divested themselves of high-fee stocks and turned to lower-risk bonds. U.S. Stock funds saw outflows of $43.7 billion in the fourth quarter, while fixed income funds experienced inflows of $41.1 billion. Though the markets have shown recent improvements, investors remained unsettled by the lingering financial uncertainty. Correspondingly, investors are moving into lower cost index products. Actively managed funds lost $30.0 billion in outflows while passively managed index funds experienced inflows of $22.8 billion.

BREAKDOWN BY ASSET CLASS OF Q4 NET ASSET FLOWS

Asset managers also face increased expense side pressure from distributors. Large broker-dealers are ramping up fees to access their platforms. Morgan Stanley Smith Barney raised base rates to $250,000 per year, per fund family, representing a five-to-tenfold spike in prices. Driving these increased demands are the relatively thin margins that wirehouses earn in comparison to asset managers. This past quarter the spread increased yet again, as distributor margins decreased while asset manager margins remained relatively steady. From 2009 to 2011, the spread between asset manager and distributor margins grew steadily and now stands at 19%. In the coming year, asset managers will likely face increased revenue sharing pressure due to the high spread.

ASSET MANAGER AND DISTRIBUTOR OPERATING MARGINS

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Using Data to Engage Advisors Online

By Saadiah Freeman

On March 1, Google will roll out its controversial new privacy policy, enhancing its ability to deliver personalized search results and advertisements by combining user data gathered across its various services. While this has raised concerns in some quarters, Google maintains that the new policy will in fact benefit users, by providing them with search results and recommendations that are more precisely tailored to their preferences. Google's proposal will certainly extend the boundaries of personalization, but most asset managers are at the opposite end of the spectrum, collecting extensive customer data, but still delivering generic advisor site content that is not tailored to individual advisors' behavior.

Despite the debate over Google's policy change, most consumers are well aware that companies already track, store, and analyze vast quantities of customer data. Indeed, personalized digital experiences are fast becoming the norm, at least for consumer-oriented businesses. Sites like Amazon.com, Netflix, EBay - and yes, Google - have trained customers to expect information that reflects their unique interests, rather than generic content aimed at a broad-based audience. The value consumers place on tailored content is clearly demonstrated by their willingness to share personal details online in order to receive more useful information. Geolocation-based services are a good example: services like Fandango, Groupon and LivingSocial ask users for their location and in return serve up information on local movie screenings and nearby discount deals. Similarly, Levi's offers an online tool which asks women for information about their body type in order to deliver customized jeans recommendations.

Although most firms in the asset management and insurance industry also gather significant quantities of customer data, very few are using this data effectively to deliver tailored digital content to advisors. Outside office hours, advisors are also consumers who more than likely shop, read articles, watch videos and look for information online. With personalization becoming a standard feature in the consumer space, it's unlikely to be long before advisors begin to expect the same standard of digital experience from asset managers. Creating this type of personalized online experience for advisors requires sophisticated data analysis. Yet kasina's recent research paper, Digital, Data-Driven, Differentiated: The Future of Marketing for Asset Managers and Insurers, indicates most firms are under-investing in analytics. 55% of the 29 firms surveyed have no analytics staff within their marketing teams, and the remaining 45% of firms had, on average, only 1 FTE devoted to this function.

Advisors realize asset managers and insurers, like most businesses with a significant digital presence, are collecting and storing data about their online activities. However, most firms don't currently have the analytical firepower, or the infrastructure, to surface tailored content to advisors based on these data points. In an increasingly personalized world, firms who fail to move beyond generic advisor sites will struggle to engage advisors accustomed to seeing highly relevant online recommendations from consumer-facing businesses. Conversely, firms who take action to create customized, data-driven digital experiences for advisors will be well positioned to capture and retain advisors' interest, attention and loyalty.

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