blog

It Takes a Village

by Lee

Last week, Barron's wrote about Trader Mark -- a.k.a. Mark Smith -- whose blog, Fund My Mutual Fund, has helped him raise $3 million towards a $7 million goal and the potential launch of a mutual fund. The article has all the juicy details about Mark's Rising Tide Growth portfolio, but what I found most interesting was one of the social networking sites mentioned: Marketocracy.

Using community input to guide investment decisions and providing higher levels of transparency are nothing new -- Metamarkets comes to mind from the late '90s -- but Marketocracy takes this to another level. The firm boasts over 55,000 people managing over 65,000 model portfolios. Based on the 100 best investors each month, Marketocracy creates the m100 Index, which is in turn used as input for Marketocracy Capital Management's investment decisions in their mutual fund. They have even signed research contracts with about 500 members of their community.

Listening to individual investors' ideas about individual securities is not going to be the right research approach for every portfolio manager, but I do think that every firm can learn from Marketocracy and from Mark Smith: in the never-ending quest for alpha, firms must get creative in their investment approaches. Online communities are only one piece, but they can be a valuable tool in identifying product or investment trends and in identifying and recruiting investment talent.

Mirror, Mirror on the Wall: Self-Reflect Before Going Global

by Corianna

Are you an asset manager looking to break into a foreign market? If so, I suggest that rather than simply going after hot markets, or basing operations in regions where you already have pre-existing investments you take a good long look in the mirror. Ask yourself, does your brand or areas of expertise make you particularly well suited to serve a particular region?

In follow-up conversations after the Future of Distribution study we have begun to see some patterns emerging amongst our clients who are pursuing international expansion.

One common approach is:

• Step 1: Push to the EU through the institutional channel.
• Step 2: Layer on retail in Europe and push institutional eastward through Middle East.
• Step 3: Arriving in Japan.

Granted, to the extent that questions of market entry are about market size, international compliance rules and savings, all firms will come up with similar answers--access to data, government regulatory information, an excel document, and some simple equations are all that's needed to figure out which regions will be most friendly to asset managers in general.

However this does not mean that all asset managers should pursue the same markets. Rather than following the herd, why not pay attention to what makes your firm unique? Perhaps you are a company whose brand hinges on reliability and low-cost. Maybe your best bet is to start in Japan, where investors are particularly risk-averse, and go to Europe later. By focusing on what makes you different you may be able to throw the conventional expansion model on its head, and carve out your own unique empire.

Planning the Downside

by Anu

Recently, I read an interesting article on oil price's impact on the global distribution of packaged goods. The head of P&G global supply detailed how the company plans for different oil price scenarios. He commented that his company's distribution system was built on decades-old assumptions of cheap oil, ad infinitum.

Decades old-assumptions are no longer relevant for P&G and the packaged-goods industry, which brings to mind the question: are executives in our industry making similar mistakes?

Specifically, is our industry assuming intermediaries will exist, ad infinitum? In recent conversations with Sales executives, we heard the push to place product at all distributor platforms, at any and all costs. During the 1980s S&L debacle, 10% of US banks failed. Is it inconceivable that distributors may fail? These are interesting times we live in. Two weeks ago, a major retail bank had trading halted on the New York Stock Exchange. Last week, securities regulators coordinated a six-state probe into sales practices on auction-rate securities. And this week, the Treasury announced that government-sponsored entities may require the US taxpayer to provide a $25B bailout (note: double the MSFT annual net income).

With the brainpower in the industry, the C-suite could plan for "extreme" scenarios. It seems that in the case of distribution disruptions, a bit of business contingency planning would enable quick decision-making. In these interesting times, is this money well spent?

A Return to the Age of Conservative Investing?

by Lindsay

While investors' quest for alpha, and subsequent interest in alternative investments, has been widely chronicled, there is another opposing force that will likely drive innovation in product development over the next several years: concerns about inflation and longevity risk pushing investors toward more conservative long-term investment strategies.

As reported by the Bureau of Labor Statistics last week, the Consumer Price Index rose at an astounding 7.9% seasonally-adjusted annual rate (SAAR) in 2Q08, and a 5.0% unadjusted rate for the 12 months ended June 2008.

The typical investor response to rising inflation, more aggressive investing, has also become a dangerous proposition, at least in the short term, as the Dow Jones Industrial Average has continued to bounce around over the past year, peaking at 14,279 in October 2007 and then plummeting to 10,731 just last week.

As reported by Ignites, several firms are taking a cue from the DB space and developing target date funds that use the principles of liability-driven investing (LDI). Essentially, these funds place greater emphasis on protecting investors against longevity, inflation, and currency risk to protect retirement income -- often at the expense of higher potential returns.

Is this trend enough to shift firms' focus from chasing alpha by developing the most obscure alternative investment vehicles to touting their safest, most-likely-to-protect-your-initial-investment funds? Will we all eventually go back to investing in utilities, like our grandparents did? It's hard to believe, but we might be going down that road...

"Do not try too hard, I may pay you too much" - Another Reason Why Gross Sales Compensation Has To Go

by Mike Ma

Later this week, I am meeting with a firm that has done extraordinarily well, so well that they would have had to pay several of their wholesalers over 7 figures at plan.

They didn't pay it. They cite the fact that the wholesalers didn't earn all of it. Surely, they couldn't have raised all that money.

To be honest, we've been saying that for years. However, I don't want to indict them directly, they are not alone. I've heard dozens upon dozens of national sales managers and distribution heads say similar things. Does this sound familiar?

"We are an outcome driven sales organization."
"People eat what they kill."
"Our team needs clear motivation."

Here's the hidden asterisk to all of these -- as long as it falls within an acceptable band (say, $250K-$500K) of compensation.

I think the way out of this is paying on sales activity. We have to deem the actions that we think are valuable, and then pay for their execution. This type of compensation is typically called "discretionary" which I think has been too small, and misnamed. Discretionary sounds optional. I think of it as non-commission variable. Not great, but we are working on it.

And I think that there is more to be gained managerially rather than lost -- we want loyalty from our employees, we want them to be "good soldiers." Then we owe it to them to have a better battle plan. The two prerequisites to making this a bigger part of your game plan are segmentation and metrics.

Think about what this would garner. In a bad year, if you think that you are going to lose 10% of assets due to performance, you could be excited that you only lost 5% with good wholesaling? In a good year, if wholesalers are just riding a performance wave, you could help concentrate that momentum to the advisors that matter most.

A greater slice of the compensation pie is going to be based on valuable, quantifiable metrics such as:

• Team based touches between sales and marketing
• Cross selling advisors to new, more stable, or profitable products
• Cross selling strategies to different product wrappers
• Penetration of new advisors at key firms
• Identification and development of top advisors
• Increasing usage of known loyalty, sales-correlating activities such as the Web

These are just a few things that come to the top of my mind. Two things stand in the way ... the ability to think of new metrics and courage to push this in your sales organization.

I would be up to help anyone in the business that is up for the challenge.

The Northeast is a Beer Desert

"The Northeast is a Beer Desert."

...Fred Eckhart

By Sean

On a recent trip to Portland, Oregon, I drank some of the finest beer made in the world. There, the beer community embraces the virtues of innovation, collaboration, and exclusivity. Imaginative brewers salute the area with commemorative beers for restaurateurs (Hair of the Dog's "Greg" brewed for Higgins' Greg Higgins), barkeeps (Rogue's "Younger's Special Bitter" brewed for Horse Brass Pub's Don Younger), and notable critics (Hair of the Dog's "Fred" brewed for Fred Eckhart). Like all good things, supply is limited. So is distribution. Seldom, if ever, are these beers found outside of the Northwest. In some cases, this is due to a lack of a scale, but in most, it is by choice.

Consultants love to draw parallels between the distribution of investment management and pharmaceutical products. Both industries are faced with increased competition and slowly-declining margins. The response, in our industry, has been to create more products with broader distribution. In the beer industry, still dominant players like Budweiser and Coors are employing the same strategy, but to limited avail. With sales growing at more than 30% over the last three years, craft breweries, like those scattered throughout Oregon, are chipping away at the market share of the major brewers, which now hovers around 77%, down from over 90% almost ten years ago.

Firms would be wise to take a page from the Oregonian craft brewers' playbook: innovative products in shorter supply and more targeted distribution channels.

Wholesaling Darwinism

by Mike Mc

The lead story in Ignites from Monday, Wholesalers Face Scary Scenario as Advisor Ranks Fall (subscription), paints a grim, challenge-laden picture for today's sales organizations. The advisor population is shrinking; the average wholesaler lacks experience; the sky is falling.

It seems that rarely a day passes now where one wholesaling apocalypse or another isn't upon us. We sometimes dabble in it ourselves.

But lost amidst the constant rhetoric -- if I never read another article about product pushing externals, it'll be too soon -- is the fact that wholesaling is entrenched as part of distribution. It's here to stay.

What's more important (and more interesting) is how wholesaling is evolving. One such evolution, hybrid wholesaling, continues to be a dominant topic with our clients.

Like a fund reaching its 3-year anniversary, hybrid implementations industry-wide are finally establishing an identifiable track record. So, are hybrids here to stay, too?

We'll be releasing a full report on this later in the month, but early returns indicate that the answer is a resounding 'yes'. Based on our analysis, here are three key reasons why:

• Profits: for the vast majority of firms, hybrids have enhanced the profitability of their sales efforts, in some cases by more than 5%. In our research, no firms have indicated a decline in financial efficiency.
• Reach: where hybrids are placed and who they target varies dramatically across firms, but they are almost always focused on unexploited pockets of advisors (by channel, by geography, by behavior). With 300,000 advisors out there, wholesaling has elements of a numbers game, making it increasingly critical to find those shadowy corners of the advisor universe.
• Lifestyle: as hybrid positions have become established, they have become an important alternative for individuals who want middle ground when it comes to travel, and for firms who want to offer careers to salespeople that do not require endless time on the road. With field time ranging anywhere from 20% up to 70%, a hybrid role can provide a range of lifestyle options.

Given costs that are roughly 1/3 as much as a traditional external, hybrids will continue to play a key role in wholesaling evolution.

The landscape is changing, but the sky is staying right where it is.

The U.S. as a "Dying Proposition"

by Johanna

At a presentation on global trends in the mutual fund market I recently attended, I heard an interesting statement made about the U.S. asset management industry:

"The U.S. is a dying proposition."

Indeed, the U.S. financial markets are suffering a crisis, but the U.S. still has far and away the largest share of the global mutual fund pie. For example, in Q407 the Americas had 51% of worldwide mutual fund assets, whereas Europe had 34% and Africa/Asia Pacific had 14%. However, one of the factors mentioned got me thinking that such a morbid statement might have some truth to it. The idea centered on product innovation, and how it has moved overseas.

It's no surprise that the amount of regulatory hurdles in the US, which makes it difficult to bring innovative products to the market, puts this country at a disadvantage, so it's also no surprise that today many new product types are introduced abroad and then appear in a 40 Act version in the states a few years later. One recent trend that began overseas and is making its way to the U.S. marketplace is thematic investing -- such as funds centered on agriculture, climate change and anti-global warming, and financial global infrastructure.

Missing out on product innovation is one sign that the U.S. is falling behind other countries in the asset management market. Despite regulatory constraints and hassles, U.S. product providers must break from style boxes to remain competitive. The first step is to rethink product development processes and move further towards a "market needs" approach. As kasina posited in the report "Rethinking Product Development," instead of getting most product concepts from wholesalers or creating line extensions of current products, firms should do due diligence with advisors and investors to understand true market needs. The firms that succeed in translating those needs into new products (that likely won't fall in the style boxes) will have a chance of staying in the global fund game.

Recapturing Margins through Measurement

by Lindsay

The asset management industry has reached a critical point in its evolution. The fat margins once enjoyed by not only the industry titans, but also the smaller, niche players, are slowly diminishing due to heightened competition, while top-line revenues at many firms are also being hit by asset outflows. So what's an asset manager to do?

The usual drivers of investors' and advisors' decision making, fund performance and product line-up, are difficult to change in the short term, and are largely out of distribution executives' control.

Distribution strategies and tactical implementations, however, are flexible, adaptable, and, most importantly, within the control of distribution executives. The asset management industry currently spends about 40% of incoming fees on distribution efforts, but most firms do not disaggregate the impact of individual initiatives and processes, preferring instead to look at aggregate sales figures.

One of things that really struck us while we were writing our latest report, Quantifying Distribution Strategies, was how much and how fast the asset management industry is changing. Not only do firms have to think of new products, new services, and new ways of doing business, but they must also re-evaluate, top to bottom, the metrics used to figure out how they're doing. Half of the executives we talked to said Sales is overvalued; the other half said Marketing is overvalued. The surprising part was that very few firms have mechanisms in place to find out, in any empirical way, who is driving what - so we outlined a few things the industry could be thinking about as it allocates valuable resources to different distribution functions.

It isn't accurate or useful anymore to treat distribution strategy as a monolithic entity; firms have to break it up into its component parts, and look at them individually. More than just the how-to of this is the 'have-to' of this: renovating business metrics is more important than it used to be. The money spent on distribution, and the lack of transparency around the results, exposes a compelling opportunity.

Where Have All the DB Players Gone? DCIO

by Sean

According to a recent study by Sway Research, "asset management firms are earning average margins of 25% on DCIO business versus roughly 18% in markets, such as mutual fund wrap and sub-advisory, and only 12% on the SMA business." As such, major defined benefit players such as BlackRock, Goldman Sachs, and PIMCO (among many others) are making a major push into the $1.7 trillion defined contribution investment-only business. In so doing, they'll be up against entrenched players like Capital Research, Fidelity, and Vanguard.

So what is it going to take for these firms to be successful? Here's the short list of things firms must consider:

• Establishing strong brand visibility among plan sponsors
• Gaining access to the large, open-architecture platforms
• Rolling out new products that meet plan participants' demands for income protection and generation over specific time horizons
• Increasing collaboration among historically channelized institutional and retail distribution and operations functions

In an environment where, according to kasina's "Future of Distribution: Stay the Course or Innovate," 90% firms are experiencing declining margins, firms with strong institutional investment management capabilities should take a hard look at the DCIO space.

Choosing Your Battles, Wisely

by Mike Trapanese

Pop quiz: what do Merrill Lynch, Morgan Stanley, Wachovia, UBS, Smith Barney, LPL, and Raymond James all have in common? (Besides national networks of high production advisors, of course).

Answer: They're all on your list of '08 focus firms. You and everyone else.

It is no surprise that this is the case for large, well-entrenched asset management shops. What's perplexing, however, is that this focus defines the industry all the way down to its smallest participants.

In the investment management profession, we often see smaller shops establish a niche by developing focused expertise. Examples that come to mind are Matthew's, Domini, Diamond Hill, and Nuveen (the manager, not the distributor). In the investment business, however, it is far more rare to see a distribution team carve out a niche within a major market segment.

Most distributors cover the national grid, however sparsely, and treat the biggest distribution partners by assets as the biggest opportunities. This is fair on paper. But given the history and stiffness of the competition, it may not make sense for a relatively young, relatively small firm.

Imagine this: a $10 billion mutual fund shop with a 5-man hybrid schmeek team focusing on the largest RIAs in the Southwest. Here's a less far-fetched hypothetical: a traditional wholesaling force that goes very deep with only Merrill and LPL. Or maybe ML, LPL, and the two largest regional brokers in each major geographic region.

The strategy should clearly vary from firm to firm based on size, approach, and existing relationships. But the question is a pertinent one for any distribution team that feels outgunned by powerhouses like American Funds, Franklin Templeton, and MFS: if everyone's focus list looks eerily similar, doesn't that leave a host of niche-building opportunities on the table?

Sometimes you've just got to let the big dogs eat-- but that doesn't mean you have to starve.

Having the Right Letters After Your Wholesalers

by Lee

Ignites ran a Q&A today discussing the value of wholesalers obtaining a CFP designation. Advanced certifications, such as CFP, CFA, or CIMA, certainly help wholesalers be able to better assist advisors and lend instant credibility to the wholesaler. Not every designation, however, is a perfect fit for every asset management firm. Ideally, companies should have a consistent distribution approach whereby its value-added programs, marketing brochures, wholesalers, and the rest of the organization tell a consistent story. It is therefore critical for firms to understand the "story" that comes with each designation and to consciously choose the right fit.

• CFP: a generalist designation focused on personal financial planning (taxes, retirement, health care, estate planning, etc.)


• CFA: a specialist designation for investment analysis and portfolio management


• CIMA: similar to CFA, but with a greater focus on asset allocation, risk measurement, and performance measurement. CIMA is only available to individuals with three years of client-centered investment consulting experience

In most firms today, wholesalers acquire whichever designation(s) are of interest to them (often without the support or involvement of their firm). There is an opportunity for firms to guide their wholesalers towards the program that is best suited to the company's distribution focus (e.g. firms that are pushing into complex alternative investments may look to have more CFAs, firms that focus on their investment process and analysis may lean towards CIMA-certified wholesalers, and firms with strong value-added programs on broader personal finance issues may gravitate towards CFP).

All Around the World With One Research Team

by Steven

Asset Management firms are struggling to devise their international sales strategy. Most executives that we talk to are very aware of the opportunities, but are concerned about how to allocate their sales resources globally. The easiest way to address this is to create a dedicated global Key Accounts team.

The big challenge is that "international" is not one region: Europe isn't one region, neither is Asia. There are very distinct regions within each of those continents, all having very different regulatory issues and distribution models. The good news is that certain large financial conglomerates such as Citigroup, Credit Suisse, Deutsche Bank, JPMorgan Chase, Merrill Lynch, Nomura, and UBS are all prevalent around the world.

What has happened over the last few years is that these global conglomerates are tightening their research around one team, for most of the US players that are in New York, to address global shelf space issues. These teams serve a dual purpose:

• Global Research -- Identify strategies that can be used across the globe


• Global Coordination -- Ensuring coordination with local research teams

These global analyst teams ensure consistency and economies of scale for the distribution of these conglomerates.

Some of our most successful clients have started to mimic this approach and have built a global Key Accounts team that is focused on positioning their products to these firms around the globe. The key success factors for these teams have been:

• Global understanding of these firms' platforms -- What products are on the shelves in each category


• Global understanding of their competitors -- How are their competitors performing in each of the regions


• Global product offerings -- Local strategies that can be leveraged across the globe

Most regions are dominated by a banking distribution model, where these central analyst teams are starting to have greater influence on the individual products that the investor sees. Sales outside of the US are mostly not sold through wholesalers, and asset managers should appropriately allocate their resources.

Starting Over with Wholesaler Compensation

by Mike Mc

What seems bulletproof under favorable circumstances can be disastrous when unfavorable ones take over. Previously unexposed, systemic flaws suddenly emerge from the woodwork. (Subprime fallout, anyone?)

As many firms slog through a difficult 2008, wholesaler compensation models are being turned upside down. In particular, suffering shops with a net sales component face serious questions as outflows increase, commission checks nosedive, and talent starts to look for the exits.

In discussing the issue with several clients recently, it hit me that it's time for the industry to face the music when it comes to wholesaler pay. To put it bluntly, the two primary approaches in place today have fatal flaws:

• Territory-based Gross Sales Doesn't Work: Recent kasina research finds that wholesalers sometimes touch only 10-15% of advisors actively doing business with the firm in a given territory and roughly 30% of incoming assets.
  
  This does not suggest that wholesalers are not valuable. In fact, the same research concludes the exact opposite. But comp models driven by territory gross sales, as most firms have, make little sense based on what wholesalers actually contribute to those aggregate results.
• Net Sales Doesn't Work, Either: Though net sales, when used, is often only a part of comp models -- 20-40% of variable pay -- it is a paycheck killer when outflows increase. Struggling firms, facing the reality of underpaying and/or losing people, are beginning to gerrymander comp structures to ensure wholesalers get paid. If an approach holds only when times are good, it's not a viable solution.

We have thought, written, and consulted a lot about wholesaler compensation. It's work I'm proud of. But it seems very clear to me that wholesaler comp models are an industry legacy whose time has passed.

Where do we go? Of myraid options, two possibilities are: tying wholesaler comp to those advisors they actually see, and enhancing the behavioral elements on pay. But the first step lies in admitting the fundamental flaws. For an industry with a substantial track record of success, I don't think it'll be easy.

eBusiness, Baby-boomers, and the Fountain of Youth

by Corianna

A few months ago I came across Thrasher Capital Management's "Demographic Convergence Theory," or DCT. The Thrasher team is pioneering the DCT as an investment strategy for their fund, GendeX. The DCT is based on three principles:

1. Gen X- and Y-ers are enjoying increasing spending power.
2. Gen X- and Y-ers are trend setters, in the eyes of baby boomers.
3. Baby boomers want to stay young forever, and will use their spending power to emulate Gen-X and Y-ers.

Issues of spending power aside, one of the DCT's main points is this: baby boomers are open to new things. In fact, the DCT suggests that boomers are more than just receptive; while they may not be first adopters, baby boomers will eagerly use the technologies and gadgets they see younger generations embracing.

While the jury is still out on the merits of the DCT as an investment philosophy, the theory has some interesting general implications, corroborated by recent kasina research for the forthcoming report, What Advisors Do Online. In What Advisors Do Online, we found that while younger generations use the Web for more purposes than their elders, older generations are more active than many--including e-Business teams at asset management firms--might expect. For instance, there is almost a 20% gap between the percentage of 20- 40-year-old and 41- 60-year-old advisors using YouTube (younger advisors are on YouTube more). However, when it comes to using asset manager Web sites for product information, the gap narrows to 2%, with the older demographic reporting a slightly higher usage.

The DCT offers an explanation for these findings, and suggests that the number of baby boomers frequenting YouTube, reading blogs, and using Web 2.0 technologies will only increase as time goes on. e-Business teams and asset managers can take heart as they push forward with new online strategies: their work will touch both the young, and those who want to stay young.

Sales to Web sites: "Are you threatening me?"

by Mike Ma

Web sites don't sell paper, gift baskets do!" -- Michael Scott, The Office, Episode 55: "Dunder Mifflin Infinity"

We've been working with a client on building out a virtual coverage model to boost their wholelsaler-driven advisor sales. A perceived roadblock in the process has been the "threatening role" a Web site can play in helping Sales.

In essence, Sales is worried that we are going to be building a Web site that will render the Sales team obsolete -- a fear reminiscent of the fictitious Dunder Mifflin Infinity Web site.

In our recent study, "Your Site Can Sell, Too," we correlate 3 large, intermediary-distributed firms' Web traffic with their sales data. The below graphic from the report shows our findings, which support the fact that Web-users consistently sell more than those who don't use the Web.

In short, our client's Sales team was worried that the Web-boost to both wholesaler channels would make it extinct like a dinosaur. However, this prompted us to develop a different cut of the data that showed the following:

While Web sites will not outsell advisors, per se, why not have everyone get on board? Is there really a need to be threatened? I think not.

Anyone have suggestions?

by Lindsay

Last week I played golf on a typical Florida course, wherein copious artfully placed, often hidden water hazards seemed to maliciously steal my perfectly executed (well, not quite) shots at every opportunity. As I was complaining bitterly about the clearly sadistic designer who had engineered this unforgiving course (forgetting, for a moment, that I was spending a long weekend in sunny Florida, while my colleagues were stuck in New York, staring at their computers), we drove across a long wooden bridge, traversing a large swamp between the 9th and 10th holes. In the midst of the reeds and about 15 feet from the bridge, was a box marked “Suggestions” perched on a tall wooden pole. It was clearly mocking us.

Golf analogies aside, the inaccessible "suggestions" box made me think about idea generation in the asset management industry, and how it differs from other industries. When executives at famously innovative companies, such as Apple's Steve Jobs, are interviewed, they often discuss the processes their companies have in place to encourage idea generation by employees at all levels. Tapping into the intellectual resources of all employees, rather than simply those employed in product development or creative capacities, they say, helps them continue to be thought leaders.

The asset management industry, on the other hand, often seems to employ a model more like the aforementioned golf course. Suggestions and ideas are nominally welcomed, but the effort that it would require to actually submit them (figuratively, swimming through the swamp and climbing the pole) doesn't seem worth it, so firms largely remain siloed, in this respect. I recently met with one firm that is taking small steps toward combating this issue. The firm has created a program through which its Product Marketing and e-Business teams actively solicit ideas from employees in call centers, and encourage participation by offering prizes for the best ideas. Anecdotal evidence suggests that the program has been successful, and that many ideas have been implemented since the program's inception.

Asset managers are often given a hard time for, with a few exceptions, playing follow-the-leader. For those who are not among the few industry leaders, tapping into the collective brain power of all employees could be a first step toward creating a creative, innovative culture and, ultimately, towared breaking from the pack.

Now's the Time to Go Global

by Steven

For firms that have yet to go global, the question is no longer a matter of if, but how. Successfully penetrating foreign markets, however, requires careful strategy and long-term commitment.

Depending on the size of the firm, global strategies may vary widely. Smaller firms ($100 billion to $200 billion in assets under management) may go the subadvisory route, for example, while larger firms (over $250 billion) might opt to establish a local presence through partnerships or acquisitions. Before sinking time and resources into foreign markets, firms must develop a strategic entry plan.

To start, U.S. players must build local expertise if they truly want to compete globally. Although many foreign markets are just starting to open up, the message is clear: Foreign investors have minimal demand for U.S. products. No matter the distribution strategy, firms must start from this premise.

By now, many global markets have already become crowded with local and U.S. players. The Western Europe market is now almost as competitive as the market in the U.S. In several emerging markets, especially in China and the Middle East, some local banks are looking to import U.S.-based asset management talent via subadvisory relationships. These opportunities are limited, however, as local banks in these regions tend to have fewer relationships than their U.S. counterparts.

For asset managers, the scarcity of platform openings is a double-edged sword. On one side, an increasing number of competitors are vying for a very limited universe of opportunities. On the other, barriers to entry make access to these markets all the more lucrative.

As asset management firms enter foreign markets through subadvisory relationships, they must move quickly to pounce on fleeting opportunities as they arise. For example, BlackRock, OppenheimerFunds, T. Rowe Price and Thornburg Investments are now looking to strike subadvisory deals in the Middle East/North African region.

A few openings still exist to establish local presences in certain parts of Eastern Europe, the Middle East and East Asia through joint ventures. In China, regulators have relaxed restrictions on foreign ventures, including opening up the insurance market for foreign asset managers. Last year, Franklin Templeton took advantage of this and partnered with China Life, China's biggest life insurer.

Without a commitment to global growth opportunities, it will be nearly impossible to compete with industry firms that have already gone global. Though the time to commit is now, firms must also be ready to stay overseas for the long run.

Social Networks: A Real Opportunity

by Anu

Conventional wisdom suggests that social networking through the Internet is a young person's game -- a new frontier for the millennial generation and something too complicated for Baby Boomers.

If that's true, are the Boomers using facebook, MySpace, and Twitter? Maybe. Instead, they may be accessing Web sites catering to their needs by creating topic-centric "groups" ready for the joining. Two sites come to mind -- eons.com and gather.com. Are these sites simplified renditions of the aforementioned? Not at all. Eons and Gather provide video sharing, blogging, reviews and many of the other features that typify social networking.

Asset management firms know that Boomers have complex financial pictures and a relatively large share of investable dollars, yet they have not created obvious partnerships with either site to broaden their appeal. In fact, Schwab seems to be providing the bulk of assistance through numerous articles and embedded links on Gather. As Boomers continue to use social networking, what place are asset management firms creating for an easy, intuitive liaison between social networks and their value proposition?

Debate or Participate: A Hybrid Wholesaling Update

by Steven

It is interesting that some firms are still debating whether or not they should invest in hybrid wholesaling, while others are reaping the benefits of a lower cost sales coverage model. Some firms want to see how other firms have succeeded, while other firms are already expanding their wholesaling reach. A number of firms with a hybrid model have had territories where hybrids even outsold their external counter parts.

Most firms know now what hybrids are -- a "hybrid" between an internal and an external wholesaler. Hybrids usually travel 20-30% of the time and have their own advisors. Firms have taken two primary approaches to hybrid wholesaling:

1. Geography -- Covering remote territories, such as South Dakota, where it doesn't pay to have an external due to the lack of opportunities or where it is not cost effective to periodically leave their territory, Minnesota, to cover the remote area.
2. Opportunity -- Covering additional advisors in a money center, such as Manhattan, that the external wholesaler can't cover.

The best recipe for success is to implement a territory team. Usually, the external will manage that team and will direct the hybrid and the internal. The team gets solidified by adding a substantial team based compensation component to the equation.

A few firms have been so successful with hybrids that they have started to further invest into the model. These firms are moving to a one-external-to-two-hybrids ratio within a territory structure.

The hybrids model has a proven track record. Decide now if you want to debate or if you want to participate.

Tangerines and the Art of Messaging

by Anu

This weekend, I took my four-year-old grocery shopping. We were looking at the fruit when I let out an exclamation: "Pixie Mandarins!" The Pixie is a relatively new tangerine -- it tastes like a jar of honey met freshly squeezed orange juice. My daughter was enthused, because I was enthused. The interesting thing about the Pixie is that it's exclusively grown in Ojai, a lovely farming community northwest of Los Angeles.

So I wanted to share my joy with fellow shoppers. To five people, I said, "Hey, these are delicious citrus fruits." And how many decided to purchase them? ZERO.

To another set of five people, I said, "Hey, have you had these? This is a Pixie Tangerine and I doubt you'll find it anywhere else in Brooklyn. It comes from this little, magical farming community called Ojai, just inland from Santa Barbara." And how many decided to purchase the citrus? FOUR.

What are we doing in our industry? Are we just telling advisors that there's "large-cap growth funds in aisle four" or are we describing the unknown value of a TIPS fund in volatile markets?

If you do nothing else, please look for those Pixies; they won't be around much longer.

Investing: Profession or Business?

by Sean

Are asset management firms more focused on disciplined investing practices or generating profits? The answer given by senior executives at most firms is "both," which raises a follow-up question: Are these objectives in direct conflict with each other? In one expert's view, the answer is "yes."

In "More than You Know: Finding Financial Wisdom in Unconventional Places," Michael J. Maboussin, Chief Investment Strategist at Legg Mason Capital Management, argues that "the performance challenges in the business stem from an unhealthy balance between the profession and the business." In his view, the traits of the investment profession (long-term horizon, low fees, and maintaining a contrarian view) are diametrically opposed to the traits of the investment business (short-term horizon, high fees, and selling what is in demand).

The solution, according to Maboussin, is to separate product manufacturing from distribution. By separating the two, firms can insulate investments (product development and portfolio managers) from the short-term demands of the market, while focusing the attention of the business (distribution) on the needs of customers (advisors and home offices). In this model, the interests of both investors (in firms' products) and shareholders (in publicly-held firms' equity) are protected. However, such walls rarely exist. Very often, distribution and manufacturing work together.

In kasina's view, firms should not build walls between product manufacturing and distribution, but should maintain a healthy separation between the two. For instance, product manufacturing should not necessarily report to distribution, but should maintain open lines of communication to gather feedback and input from the field through National Account and Sales. By the same token, ensuring that National Accounts and Sales understand the intricacies of the firm's more sophisticated offering warrants some level of access to product development.

Politics, Rock and Roll, and Value Added Programs

by Mike Ma

I am a regular reader of SPIN* magazine. You can make fun of me now.

Now that you stopped laughing, I wanted to draw your attention to "Power Ballots"* in this month's issue. This piece investigates the impact that celebrity artist endorsements and acts really have on a presidential election. Regardless of your politics, I'd like to share with you a few quotes that I think can be directly translated to questions I regularly field about our research in value added programs and how/if they help the business of selling funds or insurance products.

1. What's the point of pursuing these (celebrities / value added programs)?

"I don't think I have ever met a voter who said, 'I'm voting for a candidate because Madonna told me to.' But they may have learned more about the candidate than they would have otherwise. Ultimately, the candidate has to change their minds." -- Lara Berhthold, former national political director for Wes Clark in 2004

Takeaway: Once, an indifferent Vegas blackjack dealer caught me counting cards. I was losing money hand over fist for an hour with horrible shoe after shoe. So the dealer deadpans, "You can't polish a turd." Same rings true here -- the core part of your business needs to be in order before you can expect benefit from value added programs. No amount of practice management or boomer education program will help bad performance, bad wholesaling, or a bad Web site. (This piece is being written on a plane returning from a $100B+ asset manager who is struggling with this question of where to invest first -- core capabilities or value add?)

2. Damn, these (programs/concerts) are expensive. Where is the benefit?

"There's no one measurement you can apply to every event. Attendance may be a core goal, monies raised, press hits. We measure what we call an 'engagement sequence,' where you get someone in the front door, then gauge the drop-off over the next few actions you ask them to do." --Erin Potts, Executive Director of Air Traffic Control, a nonprofit organization that provides resources to bolster their political activism

Takeaway: Exclusively looking at gross sales post-campaign is the wrong metric. Similarly, asking if concert attendees are going to vote for a particular candidate after the show would not be instructive. Each program could have a different, behavior-based metric or objective depending on what you are trying to do.

3. What kind of people will respond to these (concerts / value added programs)?

"One kid sent all our CDs back to us, smashed, cracked, and scratched with a note that said, 'How could you do this?' He felt really betrayed, like it wasn't our place to take any political stance." -- Nick Harmer, bassist for Death Cab for Cutie

Takeaway: One saying we have at kasina is, "If the program is for everyone, chances are, it's not that value-added." While you don't have to illicit such visceral reactions from your clients, there should be a clear idea of which market segment you are targeting. Or try this, look at your programs and ask, *what segment would we never send this to?*

*Note: link unavailable, as SPIN has a 1 month online content embargo

If You Want to Attract Advisors to Your Web Site, Be More Experimental

by Lindsay

In a recent survey for an upcoming report, What Advisors Do Online, kasina asked over 500 advisors to name Web sites they currently use, that they weren't using a year ago. We were surprised by both the quantity and breadth of responses, both expected and unexpected, including:

• Seeking Alpha: A financial news and opinion site.
• Minyanville: A self-described "financial infotainment" site.
• YouTube: A site that allows users to post and view embedded video online.
• Zillow: A real estate market mashup.
• Facebook: An online social network.

What distinguishes the above sites, and others that advisors listed, was that they all incorporate innovative design and interactive functionality with ever-changing content. According to the same survey, advisors expect that the amount of time they spend online will either increase or remain the same both at home (96%) and at work (93%) over the next two years. Advisors clearly like to explore new sites, and in all likelihood, they are going to be spending more time doing it, rather than less.

So how can asset management Web sites, whose content is largely static, capture the attention of these advisors? The answer is simple: by being more experimental. While asset managers may never have the dynamic content that the above listed sites do, they do have the option to make content more interesting by trying out new formats and functionalities and seeing what sticks. Why not try out comment functionality, like Seeking Alpha, introduce a little humor to otherwise boring content, like Minyanville, or present data in a visually interesting format? What's the worst that could happen?

No One Likes a Failure...

by Lee

Since many asset management firms do not offer closed-end funds ("CEFs"), you may not be following the mess that is going on with "failed" auctions in the municipal bond market. Here is my take:

Auction-rate securities have long been a way to offer borrowers a way to finance for the long term at short-term interest rates that are periodically reset at auction. Investors have recently soured on this part of the market, due to concerns about a lack of liquidity and questions about the bond issuers.

What is a failed auction?
When there are not enough buy orders to meet the quantity of sell orders, the auction fails. A failed auction doesn't necessarily mean a loss of capital will occur, but rather that a seller cannot sell in the auction.

So what?
When an auction fails, the issuer is typically required to pay a maximum (or penalty) rate. The maximum rate typically can be either a relatively high fixed rate, such as 10%, or a formula-based rate.

What does this mean?
As a result of failed auctions, the cost of leverage for common stock CEF shareholders has increased to the maximum rate until there is a successful auction. This can contribute to a reduction in net investment income available to fund shareholders and lead to fund dividend cuts. Additionally, the issuer sees their interest costs soar.

While the failed auctions do not directly affect the securities held in CEFs or the ability of the common stock shareholders to sell their stock, the higher cost of leverage is a serious problem and liquidity for preferred stock shareholders is impacted.

What's next?
Just today, the Securities Industry and Financial Markets Association asked the SEC to allow those who issue debt to buy it as a short-term fix. As the agency evaluates concerns about whether a borrower's participation in setting the clearing bid in an auction for its own debt would be market manipulation, CEF providers are scrambling for both short- and long-term solutions.

While the resolution is still foggy, it does seem like capital is harder to come by than it has been in a long time -- and this isn't likely to change in the near future. As this all sorts itself out, I wouldn't be surprised to see providers of CEFs take a variety of steps, some which may seem drastic today:

• Many firms are already looking to new partners for liquidity (banks, insurance firms, etc.)
• Some companies may delever funds and redeem preferred shares
• Some CEF providers may even be forced to liquidate some of their funds

Trimming the Excess in Product

by Anu

In December, we released "Rethinking Product Development." The research showed that firms typically use a 'copy cat' approach in developing new products that further crowd the marketplace. In our research, we highlighted two breakthrough approaches to free the Head of Product Development from the standard methodologies. One approach utilizes a 'venture capital' method, in which asset managers make numerous 'investments' in new products, continually evaluating the new products for further investment (typically in marketing and sales initiatives) or divestment. Simply put: since nobody can predict market demand, ratings, or investor appetite, why not consider numerous products? As the best product emerges, marketing and sales can support that product's ascent.

Claymore Securities seems to have come to a similar conclusion. In January, the firm announced the liquidation of 11 (out of 36) ETFs. "There is a natural selection process when it comes to investment options and we will continue to offer products where there's the potential for marketplace appeal," said Christian Magoon, senior managing director and head of the ETF Group. In a marketplace where so little is known about investor appeal and it's nearly impossible to forecast 3-year performance, this approach has its merits.

In a January product development discussion with a top ten (by AUM) firm, the head of product development questioned the 'brand risk' from a venture capital approach. Would launching a dozen new products yearly, followed by divestment in eight, lead investors to question the firm's investment quality?

It's Crazy... but I Like It

by Mike Mc

"My name is Todd Davis. My social security number is 457-55-5462."

When I first heard that sentence on the radio a few weeks ago, I was stunned... and a little mesmerized. I know victims of identity theft, and it's been nightmare for them. $3,000 tabs at Best Buy can be just the tip of the iceberg. So, to me, Mr. Davis simply sounded nuts.

Of course, there was more to the story. Mr. Davis is the CEO of LifeLock, a company whose mission is to protect people from identity thieves. Divulging his social security number, it turns out, is a marketing ploy. I certainly noticed.

Relative to the asset management industry, I suspect I've telegraphed my point. It bothers me that I can't point to LifeLock-like examples in our industry where I have been wowed by a marketing message and forced to take notice. (The lounge music at ThrasherFunds.com, though, is nice.) At our Marketing Roundtable last year, the same sentiment pervaded the executives in attendance.

I won't pretend to be able to constructively solve this problem in a few paragraphs. But I am desperately seeking a pushed envelope in the world of asset management marketing. If anybody sees it before I do, or simply wants to talk it over, give me a call.

My name is Mike McLaughlin. My cell phone number is 917-674-1285.

(Side note: for those interested in a darker side of LifeLock and one of its founders, check out this article. Get comfortable, it's long.)

Another Starbucks Question

by Corianna

In December, Lindsay wrote a blog piece inspired by Mark Penn's new book, Microtrends: The Small Forces Behind Tomorrow's Big Changes. Lindsay recounted Penn's comparison of "Starbucks economy" of today, to the "Ford economy" of the twentieth century. Penn argues that consumer attitudes have moved from the ideal of mass production to that off mass customization. Starbucks, with its crowded menu of caffeine, milk, and flavor combinations, is undoubtedly the poster-child of 21st century customization. Who, Lindsay asked, would be the Starbucks of the asset management world?

In some ways, the asset management industry, with its cornucopia of funds, already looks a lot like Starbucks' menu. Indeed, you might think that everyone should be able to find what he or she is looking for from the industry's innumerable offerings.

It's not that simple, though; offering many things is not synonymous with offering customization. Customization is about more than just options; it's about experience. I suspect that customers--advisors and investors alike--aren't exactly awash in waves of joy when they see long mutual fund product lists. They are, I imagine, rather overwhelmed. I think it's time to step away from the Starbucks analogy. It's time to ask what customization asset-management-style looks like. And there's an answer: customization, asset management style, looks like UMAs. So, I'd like to tag a line onto Lindsay's question: Who, I want to know, will be the first to make UMAs available to the average asset management customer?

Distribution: the Competitive Advantage

by Steven

In the last month, I spoke to more than 20 asset management executives about the "Future of Distribution." I found that most firms considered product, or the ability to get capacity in products, as their key competitive advantage.

As of October 2007, there are 8,015 mutual funds in the United States, with combined assets of $12.356 trillion. It is impossible for an asset management firm that has products in all nine Morningstar boxes to have equally strong performance at all times and make products the firm's key differentiator.

Firms who distribute sub-advised funds face a different challenge. They want to tap into great performing products so that they can sell best-of-breed products. In order to get access to these products, they have to show that they can distribute the products better then the next firm can.

For both types of firms, gaining access to the large distributors should be the main competitive advanta