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Distributor Profitability

By Saadiah Freeman

Building strong relationships with distributor partners is critical to the profitability of all intermediary-distributed mutual fund companies. Yet most firms have a very limited understanding of the relative profitability of their distributor relationships. Firms typically focus heavily on revenues, but invest less time and energy in analyzing the cost of doing business with each partner. Although all firms are aware of their overall profitability, few firms analyze the relative contribution of different advisory channels to their overall profit, let alone that of different distributor partners.

When working with our clients to help them optimize their service levels and distribution approach, we have observed several common themes holding firms back from reaping the benefits of distributor profitability analysis, in particular:

• Lack of coordination. Numbers of firms conduct partial profitability analyses at a departmental or divisional level, for example within the Sales, Marketing or National Accounts teams. However, few firms allocate adequate resources to compiling these analyses into a single, integrated view of distributor profitability.
• Difficulties balancing effort and return. Attempting to allocate all fixed and variable costs, including items such as rent and the CEO's salary, by distributor creates busy work and adds little value, often causing firms to avoid analyzing costs altogether on the basis that it creates an excessive administrative burden.
• Inappropriate allocation methodology. Some firms allocate variable costs to distributors based on sales. For example, if one distributor accounted for 25% of a firm's gross sales in a given year, 25% of that year's costs would also be allocated to that distributor. This method is simple, but flawed, as it does not capture differences in cost to generate sales from different distribution partners. For example, one distributor may bring in significant sales with hardly any wholesaler meetings, whilst another distributor may require extensive support before dropping a ticket.

As a result of these pitfalls, many mutual fund companies miss out on the considerable benefits that understanding distributor-level profitability can deliver. This analysis can help fund companies with:

• Revenue sharing negotiations. Understanding the impact of revenue sharing on the overall profitability of a distributor relationship can help firms make decisions regarding the level of revenue they are prepared to share with distributors.
• Sales support decisions. Comparing the amount of time wholesalers spend with advisors at each distributor organization with the revenue generated from that relationship can help mutual fund companies to prioritize wholesaler meetings more effectively.
• Resource allocation decisions. kasina's recent Intelligent Distribution report discusses the importance of creating tiered service levels to optimize distribution effectiveness in an increasingly competitive marketplace. Effective distributor profitability analysis can help firms make decisions about the types of service they will provide to their distributor partners - for example, sponsoring events, providing value-added programs or customizing marketing materials for a distributor.

In summary, there is significant value for mutual fund companies in adopting a targeted, integrated and appropriately scaled approach to analyzing the profitability of their top distributor relationships.