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Asset Managers Go for the Gold; Seasoned National Accounts Managers Can Get Them There

by Deb Wetherbee

Listening to my two sons, 4 and 6, relive every moment of the 2010 Winter Olympics is fascinating. They don't differentiate among the various sports and perceive the US athletes as a single team. While this is true in one sense, as adults we tend to focus more on the individual effort necessary to win THE Gold in different sports. For years, financial service firms have treated the external wholesaler as the "elite athlete", the key to advisor relationships and assets, aka THE Gold. At the same time, we have been talking about the greater influence that home offices exert on advisor business. While wholesalers will remain key players, the National Accounts Manager is moving to the head of the team.

Our FA Vision survey results confirm the trend toward home office decision-making. Our most recent survey shows that advisors put 21.6% of their overall production in mutual fund wrap platforms and 33.5% of their mutual fund business in products on the recommended lists. Both of these figures are trending up from the May 2009 results. With our May 2010 survey just around the corner, we will continue to monitor this trend. Advisors also anticipate increasing use of both model portfolios and UMAs in the next year. This would lead one to believe that asset managers would invest in or reallocate resources to the National Accounts area.

While each member of the team -- externals, internals, hybrids -- is important, the role of the National Accounts Manager is critical. The home office relationship is at the center of a successful distributor/asset manager relationship. It is imperative that Sales and National Account teams work in tandem to support your focus firms. In our recent research reports on wholesaling, one on Internals and one on Externals, we found that 65% of asset managers intend to increase their Internal staff and 59% of firms do not intend to reduce their Externals. Asset Managers do understand this at some level. Our newest research, Excellence in Distribution: National Accounts, shows that 68% of firms plan to increase staff while 48% plan to increase budgets. With the communication and coordination involved in developing strong relationships at the home office, everyone at the asset manager needs to work together to support the focus firms. This effort must have the right person leading the team.

One tactical win/win reason to get your players on this same team is to develop a successful cross-selling strategy. Our FA Vision research shows that, on average, advisors use between 7 and 8 asset management firms (channel stats available, too). If yours is one of them, it is more profitable to cross-sell to these advisors than to find new advisors. This cross-selling strategy should start at the National Accounts level (I realize platform access comes first). At this point our research shows that most advisors usually use between 3 and 4 products from one firm. Of course, every product is not suitable for every advisor, but this presents a great opportunity to work closely with your distribution partner and identify the advisors to go after for your cross-selling efforts. In addition to enhancing your relationship with the distributor, a cross-selling strategy forces the National Accounts team and the Sales team on the same page with a targeted plan to increase assets. This, of course, the ultimate goal of all involved.

The industry is making strides in the right direction. There are still challenges that can be met with creative solutions recommended in our report on Excellence in Distribution: National Accounts.

As we get to the mid-point of the 2010 Winter Games it will be interesting to see if my boys begin to see the individual "elite athletes" or continue to view them all as part of the US team. Your distribution strategy needs to be implemented by a cohesive team to be effective and competitive. At the head of that team, it is time for the baton to pass from external wholesalers to National Account Managers.

Wholesalers Find Success by Focusing on Fewer Advisors

by Steven Miyao

On average, asset management companies' wholesalers currently cover 3.4 states, totaling about 1,550 advisors. These wholesalers average only 1.57 visits per year to each advisor they meet with. Our research has shown that this is problematic for two primary reasons:

1. Many advisors go without any wholesaler visits
2. It doesn't enable the wholesaler to maximize their meeting to sales ratio

Our FA Vision data shows that there is virtually no difference in advisor advocacy when a wholesaler meets an advisor 0-2 times. However, there is a 29.6% increase in advocacy with 2 to 3 meetings, and a whopping 75.9% increase with 2 to 4 meetings.

This data clearly shows that it pays for a wholesaler to see an advisor at least four times per year and that this substantially helps the wholesaler to build a strong relationship with the advisor. On the flip side, it doesn't pay for a wholesaler to meet with an advisor less than 2 times a year.

Wholesalers are pressed for time and have too many advisors in their territories. If wholesalers need to meet with advisors at least four times per year to get a higher yield for their meetings, wholesalers can't cover more than 200 advisors.

To maximize productivity, firms need to identify focus firms and focus advisors within territories and ensure that wholesalers are directed to spend their time with these key 200 advisors. 63% of firms currently incent their wholesalers on focus advisors, while 47% of firms incent wholesalers to spend time with focus firms.

How iPads May Help Wholesalers

by Lee Kowarski

Since Apple introduced the iPad, several articles have discussed how financial advisors will be among the audiences to benefit the most. While iPads can certainly be helpful for advisors, I think that the iPad will have a greater impact on how wholesalers use technology. Before the iPad was introduced, I'd already heard of several asset managers that were considering scrapping laptops for their wholesalers and replacing them with netbooks. I think that firms should now explore the opportunities presented by the iPad to enable wholesalers to access CRM information, access intranet content (e.g. brochures, fact sheets, etc.), present content to advisors (including dynamic charts, videos, and more), and more.

The iPad will boast many advantages over both PDAs (e.g. BlackBerrys and iPhones) and laptops or netbooks:

• Simplicity of use - perhaps the key advantage of an iPad is that it has an intuitive user experience that doesn't require technology expertise. Wholesalers, traditionally, are not the most tech savvy folks and will appreciate the simplicity of Apple's design
• Battery life - the iPad should be able to last a full day of meetings without needing a recharge - the same cannot be said for most laptops or netbooks.
• Weight - while heavier (and larger) than a BlackBerry or iPhone, the iPad is far lighter than any laptop or netbook.
• "Cool" factor - for at least the first several months, having an iPad will be a conversation piece with advisors.

Because asset managers are typically so slow to embrace new technology, I don't expect many firms to get iPads in the short-term, but I do think it is well worth exploring.

2010 Predictions

by Steven Miyao

These are interesting times in asset management. Aside from ups and downs in the markets, we have seen significant changes in the economy, industry product trends, distribution and e-business. So, I will lay out a few prognostications in each of these areas:

Industry trends:

1. Bond flows continue to dominate (>70% of flows) early in the year. Flows into equities dominate (>70% of total) the 2nd half of the year, after definitive data says that the economy is improving. Continuing a long-standing trend, investor flows follow performance. Strong equity flows replace bond flows after the stock market surges and after interest rates start to rise and bond prices fall.

2. Net flows continue to go predominantly to low fee shops, as the miniscule total returns of the past 10 years magnify the importance of fees. Those shops without low fees only draw net flows if their products are truly differentiated.

3. From a trough of 18% in the 1st quarter of 2009, gross profit margins for firms climb back above 30% again (2008 margins were at 30% for publicly traded asset managers). The ultimate winners will be those who maintain their focus and fiscal discipline even after assets recover, setting themselves up for sustained, intelligent growth.

Strategy and product:

4. M&A picks up, in number if not in dollar terms. Firms have shored up balance sheets. Those in the best financial shape look to acquire in order to expand international presence, shore up product gaps, bring on an attractive brand name, and gain scale. Small to mid-size firms with entrenched brand names or specialized product expertise are attractive targets. While we don't expect to see deals of the size of BlackRock/BGI, we do expect to see a handful of mid-size household names change hands.

5. Guaranteed income products become hot, both in and out of retirement plans (albeit hotter in retirement plans than outside). Limiting downside risk in portfolios continues as a focus for retail and institutional investors.

6. ETFs continue to proliferate and gain market share. Advisors continue to gravitate clients from open-end funds to ETFs as advisors understand how to optimize usage of ETFs and firms continue plug product lineup holes with all possible flavors of ETFs.

Distribution:

7. Wholesaler compensation continues to recover. Average total compensation for external wholesalers, which was $372,000 in 2007 and dropped to $295,000 in 2008, fully recovers to 2007 levels. While the ample supply of talent looking for work should suppress wages, firms' healthier financial positions, their desire to take care of their best performers, and renewed positive net flows puts upward pressure on total compensation.

8. Ten of the top 20 firms in assets have hybrid wholesalers by the end of 2010. The cost-effectiveness of hybrids is being proven by the early adopters. Additionally, advisors indicate more willingness to deal remotely and less time to meet face-to-face, both of which point towards internals and hybrids becoming more important.

9. Firms continue to leverage technology by experimenting with video, audio, and web conferencing capabilities to deliver 1-to-1 (wholesaler-to-advisor) and 1-to-many (interactive Q&A with in-house experts) interactions.

e-business:

10. Social media becomes mainstream in financial services, but the level of commitment is varied, some firms diving in with both feet, some much more cautiously. Progressive firms experiment with different media in both B-to-B and B-to-C arenas. By year-end, 18 of the top 20 firms in assets have dedicated pieces of their budgets to social media.

11. Firms begin to move away from considering their websites as the central repository of content and towards supporting broader distributed content (e.g. SlideShare, Scribd). As print costs skyrocket, advisor only content becomes outdated, and people are free to distribute content anyway, firms will decide to make this as easy as possible by making their content portable and omnipresent. One major firm takes the leap, and spends as much on managing and facilitating data and content in the "distributed arena" as they do on their own website.

Internal Wholesalers - Sorely Needed by Firms and Advisors, but Trapped in Roles

by Eric Daugherty

This week, kasina released Excellence in Distribution: Internal Wholesaling. In this third of five reports in our Excellence in Distribution series, we found that firms face different challenges in their internal wholesaling force than they do with externals (outlined in my prior blog piece).

As an Eagles fan, I remember when Ricky Watters refused to give full effort in a game. When questioned about it, his reply was "For Who? For What?" Firms risk having their internals adopt the same attitude if their jobs continue to demand more, while offering less compensation or promotion upside in return.

Notably, firms have too few internals, relative to their external and hybrid peers. At half of firms, internals support more than one external, on average. And, with firms having let go some externals, internals are doing more selling and servicing than ever before, spending almost as big a portion of their time doing so as externals do.

While a majority of internals aspire to become external wholesalers, only a quarter actually do so. This disconnect between aspiration and reality will become problematic for firms who do not develop a plan to inspire, engage, and retain their best internals - particularly as the job market improves and the competition starts hiring again.

Not only are internals stretched to do more tasks than ever before, but their territories of advisors are unwieldy, which inhibits focus. Firms spread externals over territories that are too large, which inhibits focus. Our research indicates that internals average roughly double the number of advisors on which they can really focus.

On the compensation front, firms' packages are not optimally designed to reward and motivate the activities that are most vital for internals and their firms. Firms indicate that key quantitative metrics for internals include number of calls made and completed, and number of client relationship management entries made. Firms also value important qualitative factors such as product knowledge, teamwork, and call quality. Yet, only 7% of average total compensation is discretionary, not enough to separate the best from the rest of the pack and reward for excellence.

Our FA Vision study and our What Advisors Do Online research indicate that advisors' needs and desires are changing - they are more interested in the quality of wholesaler contact vs. quantity; they are more open to technology solutions to access information and services; and, their time is more at a premium than ever. This bodes well for tech-savvy, efficient internals. Their cost-effectiveness and productivity should position internals to be the stars of the show. Firms intent on keeping their best talent engaged and should revisit their practices regarding their internal sales forces, avoiding the "For Who? For What?" mindset.

External Wholesalers, Fewer In Number, Face Rising Expectations

by Eric Daugherty

In December, kasina released Excellence in Distribution: External Wholesaling. We found that diminished brand loyalty and reduced assets have changed advisors' expectations of wholesalers. At the same time, firms' financial imperatives caused them to reduce both the number of and compensation packages of external wholesalers. These tensions make the present an opportune time for firms to review how they staff and deploy their sales forces.

When it comes to optimizing wholesaling, firms really have four key levers they can pull:

• Sales Force Structure and Selling Process


• Territory Management


• Compensation


• Technology Deployment

In essence, these boil down to: getting the right number of the right people spending their time on the right things, deploying them intelligently against the client/prospect base, giving them the right incentives, and the right tools to work with. Of course, this is what firms should always be striving to do. Yet, we found quite a few sub-optimal practices.

Notably, firms still have too many externals, relative to more affordable hybrids and internals. Yet, despite the fact that externals are an expensive resource, firms get only 57% of their time facing the client, with the other 43% is spent on travel, meetings, and other administration (best practice firms manage to have 70% of time facing clients).

When it comes to territory management, firms spread externals over territories that are too large, which inhibits focus. Many firms still rely on channelization, which may no longer be cost-effective.

On the compensation front, externals are still driven by huge sales commissions. Firms would be better served by driving compensation via discretionary bonuses that are tied to firm profitability or activities that add value over the longer term.

Our FA Vision study and our What Advisors Do Online research indicate that advisors' needs and desires are changing - they are more interested in the quality of wholesaler contact vs. quantity; they are more open to technology solutions to access information and services; and, their time is more at a premium than ever.

Given all that is in flux, firms have an unprecedented opportunity to re-cast their sales efforts to serve advisors better. Yet most seem to have honed in on compensation and headcount as the primary concerns, and have not yet taken the opportunity to optimize the other levers that they control. However, to their credit, the most progressive firms are starting to move in this direction.

Is it Easier to Service the RIA Market Today?

by Deb Wetherbee

Historically the RIA market has been a challenging channel for asset managers to cover for many reasons. Generally speaking, RIAs do not like wholesalers, do not feel asset managers contribute to their value proposition, have fickle, "entrepreneurial" personalities, and are located in disperse geographic locations. This makes coverage models frustrating and expensive. However, there are clear signs that RIA receptivity to asset managers is changing.

The current market environment has led many advisors to change firms and to shift channels altogether. In addition, RIAs core investment philosophies were tested over the last year. These facts, combined with asset growth in the channel, make the RIA channel very appealing. More than 70% of RIA's new assets are coming from full service firms, according to a TD Ameritrade survey.

By some accounts, it appears that RIAs may even be eager for your advice. We saw this in the wirehouse and independent channel as early as last December. Our partner, Horsesmouth had a record number of financial advisors seeking out content, asking for advice on how to talk to their clients, and simply looking for a place to share the horrors of the day. These sentiments were echoed at kasina's recent Distribution Summit by Ron Fiske, EVP at Fidelity, as he discussed the Registered Investment Advisors that his division services. After selling to RIAs in the late 1990's myself, it was refreshing to hear that the time may have come for RIAs to willingly accept information from asset managers. RIAs are looking to understand and to provide clients with explanations. Whether economic, portfolio related, or tax-centric, it appears that your thought leadership will now be well received.

This paradigm shift, in conjunction with the fact that RIAs appreciate web-based communication, makes servicing them a profitable proposition. Our FA Vision research shows that 61% of RIAs prefer web / e-mail based communication over the more expensive phone and in-person service. There are many successful hybrid teams servicing this channel, which is a much more efficient distribution model.

As you develop your 2010 plan and focus on profitability, think about the RIA channel. Keep in mind that you may finally be able to leverage your existing content. Review your economic and portfolio manager content and communication strategies, and think about webinars and hybrids. It is even likely that an existing business-building program is perfect for this audience. The strategy to grow your RIA business could be a profitable one for a change.

Redefining the Wholesaler Team

by Deb Wetherbee

Over the past few years, in an effort to grow their businesses, more and more advisors have adjusted their traditional broker/sales assistant tandem to a team with more specialists. This is evident in our new FA Vision research, where 73% of advisors indicated they were part of a team. With increasingly sophisticated investors, it only makes sense to have more expertise available on your advisory team. The larger team concept is catching on, from inclusion of investment specialists to estate planning experts to business development experts. The benefits of working on a team are evident, and the idea is catching on in wholesaling too.

As kasina has been saying, asset managers need to maintain strong distribution teams that contribute to overall firm profitability. Our Costs of Compensation study suggests that you need to reward your best producers and find ways to keep job satisfaction high. We are beginning to hear about innovative distribution team arrangements in the field that help to retain top sales people. The team structure allows the members to focus on what they do best. The external can focus on face-to-face meetings while the hybrid deals with sophisticated RIAs (read our blog on this topic). Creative firms are, like advisors, turning to new team structures.

I have spoken with a number of firms that have added a third individual to the traditional internal/external team in each sales territory. The first example includes firms that have added a hybrid wholesaler. This givens the team the flexibility to cover the territory in the most appropriate way, based on the unique geography and advisor segments of each territory. In larger territories with fewer money centers the hybrid may cover advisors in remote locations. Alternatively, in territories with more money centers, the hybrid may cover more sophisticated advisors who do not require many in person visits.

Another example of using a third team member is the addition of a "CFA-type" or "National Account-type" to each existing external/internal team. This allows the team to bring additional portfolio expertise to sophisticated advisors, RIAs, Bank Trusts, or even the home offices that in their territory.

These models give teams the ability to customize their service offering at both the advisor and territory level, as well as optimize the different skill sets of the internal, external, and hybrid or "CFA-like" analyst.

Just as financial advisors have responded to investors' more specialized needs by creating teams of their own, asset managers have also begun to mirror their clients (the advisors) with creative sales team structures. The rewards for the asset manager are plenty: a more customized level of service to the advisor, efficiencies at their own firms, a more diversified firm/advisor relationship, and more ways to control compensation. I expect to see more unique team arrangements on both the advisor and wholesaling fronts over the next few months.

kasina Study Shows Sharp Compensation Decline, Projected Rebound, and Offers Recommendations To Optimize Practices

This week, kasina released Costs of Compensation: Sales and National Accounts 2009 . As you would expect, data showed that on the heels of the fourth quarter meltdown that drastically took down markets and fund flows, Sales and National Accounts professionals took a big compensation hit in 2008. For example, external wholesalers saw declines of 10% in base compensation, 22% in variable compensation, and nearly 21% in total compensation versus 2007 levels (see graph below).

The data show that, depending on their roles, most Sales and National Accounts professionals experienced total compensation declines ranging from 10% to 30% in 2008 (versus 2007). Internal and hybrid wholesalers were mostly insulated from these declines. The silver lining is that firms estimate that 2009 will see modest increases in total compensation for most roles, but not enough to get back to 2007 levels.

Despite the fact that all firms were dealing with similar challenges in the sales space, three distinct approaches to handling compensation and headcount during the financial crisis emerged (see my prior blog piece, Crisis = An Opportunity Not to be Missed, for a discussion of these approaches):

1. Duck and Cover: 33% of firms
2. Across the Board Cuts: 45% of firms
3. Opportunistic Rationalization: 22% of firms

The report makes three main recommendations:

1. Rationalize intelligently to ensure reasonable pay and keep top people happy
2. Incentivize productive activities, not just end results
3. Tie sales to profitability

We found that firms starting to deploy these strategies are better positioned to capitalize as the economy and market recover. Their best sales professionals will still be fully engaged and with the firm. Furthermore, their compensation systems and processes will be aligned to reward performers who help advance the firm's long-term value creation and profitability.

Speak Up or Live with the SEConsequences

by Lee Kowarski

Asset management firms need to speak out about the administration's proposal to give the SEC the power to create "rules prohibiting sales practices, conflicts of interest, and compensation schemes for financial intermediaries...that it deems contrary to the public interest and the interests of investors." The full text of the proposed regulation is available in a PDF document on the Treasury Department's Web site.

Managers should be very concerned about the lack of specificity in the July 10th proposal. However, as Ignites pointed out yesterday, the industry has remained silent on this topic. As currently worded, the Commission would be given free reign to limit and potentially eliminate, revenue sharing, sales loads, commissions, and possibly other pieces of the industry's current financial structure.

Personally, I am opposed to the SEC acquiring any additional fee-setting powers. I believe that such issues are better addressed through clear and easy-to-understand disclosure, and would prefer to see the Commission focus that rather than their current notion of "the public interest". That said, asset management firms - either through the ICI or individually - must articulate their position on this critical topic. Companies should speak out loudly and quickly in order to influence this legislation and ensure that they, and their distribution partners, retain the flexibility needed to be profitable businesses.

The Rise of the National Accounts Manager

by Mike McLaughlin

Is the role of the National Accounts Manager becoming more important?

At our National Accounts Roundtable, the answer was a definitive "yes". Attendees universally agreed that the NAM role is increasingly strategic and vital. Two reasons why:

• NAMs must have the business, product, competitive, and distributor-specific knowledge to drive success with large distribution partners.
• NAMs must play a key role in successfully coordinating firms' sales, marketing, investment management, and operations resources with the relationship management, distribution, due diligence, and platform resources on the distributor side.

These responsibilities reflect those of a quarterback in football. Not only do NAMs need to coordinate resources, but they also educate the firm about all aspects of their distribution partners, and set strategy for how the firm can best meet those partners' needs.

The Roundtable conversation very-much reinforced several of the key recommendations in our latest report. Our discussions with distributors and subsequent analysis led us to conclude that firms need to upgrade and invest in NAM talent and focus NAM activities.

Why? First and foremost, as noted above, NAMs have become increasingly critical in helping firms devise and execute their strategies with key distribution partners. Two other factors also play a role:

• Smaller NAM Staffs: only 30% of firms have plans to hire NAMs, and the average team has only 7 managers to cover all distribution relationships.
• Increasing Distributor Demands: In-line with Steven's post, distributors are requiring more/better service from their product partners and leveraging their positions in the value-chain to get it.

The Roundtable discussions revealed that several clients have focused their NAMs on 2-3 key relationships each, giving them the responsibility of matching capabilities against distributor needs. In addition, firms are increasingly looking to the distributors themselves to source National Accounts talent. Almost without exception, our clients feel these strategies are helping their businesses.

From kasina's perspective, the bottom line is this: just as quarterback is the most important position on the field in football, so too is the NAM role continuing to emerge as crucial to ensuring future distribution success.

BlackRock and MainStay Tops in Wholesaler Satisfaction

by Lee

As you may have read in Ignites this morning, our recent FA Vision survey found that the most effective mutual fund company external wholesalers are those from BlackRock and MainStay Investments. The survey was (to our knowledge) the industry's largest-ever survey of financial intermediaries: 3,129 responses gathered between April 2nd and April 20th, 2009. We also announced that we are starting an FA Vision "Nugget of the Week" newsletter where we will share additional findings from FA Vision each week. I encourage you to sign up to receive these updates.

BlackRock's wholesalers, who received an FA Vision Wholesaler Effectiveness Score of 84 out of 100, are specifically acknowledged for their ability to help conduct client meetings. MainStay's wholesalers (83 out of 100) are especially recognized for their availability and responsiveness.

The firms with the highest Wholesaler Satisfaction Scores in the FA Vision survey are:

1. BlackRock
2. MainStay Investments / NYLIM
3. JPMorgan Asset Management
4. Nationwide Funds
5. MFS Investment Management
6. Natixis Funds
7. Ivy Funds
8. PIMCO / Allianz Funds
9. DWS Investments
10.Janus Capital Group

In the increasingly competitive mutual fund industry, firms must work to understand whether they are getting the most out of their investments in a wholesaling force. The best wholesaling forces are spending more time segmenting their advisor base and focusing their wholesalers' time. This is illustrated by the fact that each wholesaler from the firms with the best Wholesaler Satisfaction Scores meet with fewer advisors more frequently. Among advisors that meet with an external wholesaler, we found that the average producer meets with a firm 2.81 times per year. Wholesalers from the firms with the highest Wholesaler Satisfaction Scores meet significantly more frequently with their producers: BlackRock (3.80 meetings per year), Nationwide Funds (3.57), JPMorgan Asset Management (3.29) and MainStay Investments / NYLIM (3.27).

The Wholesaler Satisfaction Score is a weighted average of evaluations of a firm's external wholesalers by advisors who do business with that firm, in each of the following categories:

• Knowledge about their firm's products (22%)
• Knowledge about competitive products (20%)
• Availability / responsiveness (20%)
• Ability to deliver value-added programs (19%)
• Effectiveness of follow-up (19%)

Source: Horsesmouth and kasina - FA Vision

The Age of Scale - How BlackRock Redefines Scale

by Steven

The BlackRock/BGI merger will create the world's largest money manager with $2.714 trillion in AUM and clients in 60 countries. The biggest impact on the asset management industry will be increased pricing pressure, leading to a decline in profitability. Only firms that have significant scale, or those that are small enough to be niche providers with differentiated product strategies, will be able to thrive in this new world.

The global asset management industry, like many other industries before it, will evolve into a natural barbell. On one end there will be giant asset managers who have the scale to compete globally along the entire value chain in multiple product lines. These firms will subsist on minimal margins within commodity areas, which will be sustainable due to massive scale. On the other end of the barbell will be boutique shops that specialize in specific pieces of the value chain - either through differentiated products or by focusing on particular geographic areas.

A recent blog of mine, as well as our report, Evolving Distribution Amid Bad Markets, explain that distributors are looking to create more advantageous revenue sharing agreements that will squeeze asset managers even more. The squeeze will primarily apply to any commoditized utility product, such as actively managed funds, ETFs, or index funds that fit into one of the nine traditional Morningstar style boxes.

This will not only be the case for firms domestically, but also globally. Distributors have already started to centralize their research functions in order to acquire favorable global revenue sharing agreements. Only the asset managers that are truly global will be able to partner with distributors globally and win the best distribution agreements.

Having significant scale will enable firms to lower their fees, similar to what Wal-Mart has achieved in the retail world. Scale also impacts firms' spending abilities. For example, an asset manager with $1 Trillion in AUM can afford to have 200 external wholesalers while maintaining a desired profitability level. Logically, a firm with $100 billion in AUM should then be able to spend one tenth of what a larger firm might spend, while matching the larger firm's profitability. Are 20 wholesalers enough to support all the major bank/wires, independents, and RIAs? Most $100 billion firms with traditional wholesaling models will need at least 40 wholesalers to cover all channels. Relatively speaking, with 40 wholesalers, their cost is double that of the $1 trillion firm. This example helps to show why firms will need to revisit their wholesaling models(perhaps including or increasing cost-effective hybrid wholesalers), not to mention their overall business strategies.

Unless an asset manager has significant scale, lower profits are going to be the norm for firms who provide utility products. We estimate that net profit margins industry-wide have already fallen from 20% to 8% over the past year. Unless firms scale up, they will have to evolve their products and provide significant additional value to justify higher fees.

Home Office Desires Conflict With Those Of Advisors

by Deb

Lately the interests of home offices seem to be diverging from those of advisors. This is curious, in that they should have a shared end goal of selling more financial products and services. This discrepancy became increasingly apparent to me as a result of the findings of our new research, Evolving Distribution, as well as what I learned at our own National Accounts roundtable and the Morningstar conference. This gap has always existed to some degree, but seems to be widening (at least temporarily). It certainly makes marketing and sales strategies difficult for our asset management clients.

Home Office Priorities:

• Models - home office due diligence


• Removing redundant products (fewer asset managers)


• Passive approach

Advisor Desires:

• Advisor due diligence


• Adding asset managers and choice


• Active funds

We know that margins are down and that merging distributors will address the redundancy of both products and platforms in the coming months. Additionally, distributors are increasingly using models and UMA platforms to bolster profitability and strengthen their holds on client assets. Lastly, home offices seem to be focusing more on passive investing.

The advisor story is in sharp contrast. They claim they are ramping up their own due diligence, ditching the buy and hold strategy (did they ever really embrace it?) and moving towards active managers. Some advisors have increased the number of asset managers they use per asset class and are claiming diversification.

I am very much looking forward to gathering real intelligence on this "gap" from the results of our joint advisor survey with Horsesmouth, FA Vision. It will be enlightening to hear what 3,500 advisors have to say about their current practices, including investment decisions, product choices and favorite firms. Taken in conjunction with the information from our Evolving Distribution report, this will arm our asset management clients with comprehensive information about both home office and advisor desires as they embark on intelligent planning for 2010.

The Changing Nature of National Accounts Compensation

by Lee

Between the discussions at our recent National Accounts Roundtable and the research for our upcoming report on Sales & National Accounts compensation, I see a need for the compensation structures used for National Accounts personnel to be updated to take into account several issues:

• Massive Distributor Upheaval - as we wrote in our latest report, broker/dealer firms and other distributors are in a state of change due to consolidation and mergers, as well as an ongoing platform rationalization process. Compensating National Account Managers only on sales at the specific distributors that they cover is a recipe for disaster, given the limited amount of control that National Account Managers will have on many changes. Asset managers should instead look to use team goals to drive the majority of sales-based compensation, with individuals being additionally rewarded based on discretionary factors, as described below.
• Alignment - many National Accounts Managers are still compensated based on the number (and size) of their "wins". Not all platform "wins" are created equal (just as all speaking slots are not equally valuable), and some opportunities may turn out to be wasted efforts for the firm (e.g. a non-competitive product in a small asset class). Rather than paying for "wins", asset management firms should look to have their National Accounts Managers serve as advocates for the firm's best interests. A National Account Manager that rejects a bad business opportunity should be rewarded for doing so.
• Revenue Sharing - similar to the alignment issue above, most National Accounts teams do not consider revenue sharing agreements and consider all dollars to be equal. Different products, however, have different profitability levels associated with them, and this becomes exacerbated when you add revenue sharing to the picture. A few firms now take revenue sharing levels into consideration and adjust commissions accordingly. In this manner, National Account Managers are most highly compensated when the firm makes the most money.

Measuring DCIO Sales - imprecise, for now

by Anu

kasina's experience is showing that DCIO wholesalers are measured on activities. In speaking with three large DCIO firms, each has turned to activity-based metrics from the CRM system to measure wholesaler effectiveness in this growing channel.

Why?

Because the value to small and mid-market retirement services of trying to measure sales through omnibus accounts and other opaque sales processes is not worth the cost of measuring (which only increases with the error factor).

Still, firms are not throwing in the towel on improving effectiveness within the DCIO channel. Here are three high-quality techniques that I heard about in my discussions:

• Ascertain lists of FAs that do significant DC business


• Within these lists, look for advisors (manually, unfortunately) who recently left their firm as better candidates


• Look for advisors that show receptivity to your firm's mutual fund business (by net sales positive numbers)

These straight-forward steps reduce the hunt and peck significantly, and enable DCIO wholesalers to speak to an interested audience.

We'll continue to research sales methods and techniques for DCIO. The story is just beginning...

Will Advisors Let Distributors Control Investment Decisions?

by Eric

This week, kasina released Evolving Distribution Amid Bad Markets, Changing Distributors, and Lower Profits. Big title - big ideas! As firms are grappling with a radically altered financial services landscape (see net profit margin graph below), the distribution challenges are many. We worked with asset managers and their largest distributors to distill the key challenges, predict how the landscape will continue to change, and recommend key action steps to maximize distribution success in this new environment.

Among the interesting findings is the near-universal agreement that investment decision-making at distributors will become further centralized. This means greater utilization of model portfolios and recommended managers/products.

While it may seem that competent, professional advisors would bristle at having these sorts of decisions taken out of their hands, especially given the poor performance of so many products over the past year, our research makes the case that advisors will end up supporting, not opposing, this trend. Two reasons why:

• Advisors' Time is Limited: Investment management and selection is something the average advisor spends 17% of his time on. Given that distributors have full-time staffs dedicated solely to these disciplines, and numerous partners that provide these services, it makes little sense for the vast majority of advisors to focus on developing and executing investment expertise.
• Advisors' Focus Lies Elsewhere: Advisors have a complicated job in prospecting for new clients, servicing existing clients, and executing administrative responsibilities. For many, investment selection is currently in the back seat, with the focus on retaining and assuring existing clients. In difficult times, advisors will be willing to turnover investment, allocating, and rebalancing responsibilities.

These are just some of the important implications we discuss in Evolving Distribution. To discuss it, or other aspects of the report, e-mail us with questions or thoughts. Or better yet, use the kasina forum to post thoughts and questions.

Improving Your Distribution Strategy Based on Advisor Data = Advisor Vision

by Lee

As you may have read in Ignites this morning, kasina and Horsesmouth have partnered to launch Advisor Vision, a new service that provides executives with the information that they need to evolve their intermediary distribution strategy into one that is more profitable and sustainable.

Given the amazing amount of changes in the financial intermediary space due to the markets, broker/dealer mergers, etc., asset management firms have an increased need to understand what financial intermediaries are thinking and doing. At the same time, distribution executives are looking for guidance on how to improve the allocation of their resources in an effort to maintain profit margins, which are shrinking from an average of about 35% to 15% or less.

Recognizing these challenges, Advisor Vision taps into the Horsesmouth community of over 70,000 financial intermediaries from 300+ firms on a daily basis and provides asset management firms with detailed, actionable recommendations that are dictated by their business strategy. The frequency of the surveys and the transparency of the data are unparalleled in the market today. Along with the uncensored survey data, Advisor Vision provides clients with a level of customized analysis and recommendations that makes Advisor Vision a necessary tool for all forward-looking distribution executives.

More details are available online or e-mail me to set up some time to discuss our new offering.

Fighting the Downturn from the Top Line

by Mike McLaughlin

Amidst the ongoing cost-cutting across the asset management industry, an old Harvard Business Review article provided me with a good reminder this week.

Leading Change from the Top Line presents an interview with Schering-Plough executive Fred Hassan and his strategy for turning around flagging businesses. Mr. Hassan's approach contains good food-for-thought for asset managers.

Unlike many of his peers, and, coincidentally, current asset management executives, Mr. Hassan prioritizes top-line growth to navigate difficult business environments. In other words, in tough times he focuses on motivating and investing in salespeople to foster a business turnaround. Three primary reasons:

• Product development cycles (in Mr. Hassan's business, and in ours) are too lengthy to immediately transform results.
• At some point, there are no more costs to cut. Cost management can help for a year or two, but top-line and market share growth do more to ensure long-run success.
• Salespeople most directly impact clients' moods. As their morale goes, so goes that of clients. And damaged or lost client relationships can take 6-18 months to repair.

That last point resonates most with me. Assuming the markets eventually recover, a motivated, positive salesforce can enable a firm to take advantage of that recovery ahead of the competition.

Of course, many asset managers face additional issues within the sales ranks. Specifically:

• Firms have already shed many wholesalers.
• The wholesalers that remain in place are not the happiest campers. Any loosening of the labor market will bring a lot of turnover along with it.

So where does this leave us? For firms to position sales to help lead themselves and their customers to greener pastures, I think firms need to take honest stock of three things:

• Sales Morale: If the market recovers later this year, how much turnover will we see? How much disruption will this turnover cause to our relationships and our business?
• Compensation Structure: Does our sales compensation model do enough to protect our sales professionals in down times and the firm when business is great? Or does it ensure drastic highs and lows that undermine the stability of the team?
• Team Structure: How can we inject or augment our use of hybrid wholesalers to expand our relationships with advisors and gather assets more cost-effectively?

It is vital that firms undertake these analyses now, not after things have turned for the better. By then, it'll be too late. Proactivity on all three fronts - morale, comp, team structure - will position firms to deliver on Mr. Hassan's tried-and-true strategy of using the sales team to lead business turnaround.

The Industry is Deluding Itself

by Lee

From an Associated Press article from this past weekend entitled "Funds' 1st Qtr returns looking better than 4th Qtr:"

"The news won't be good [for mutual fund investors]... but it won't be nearly as gruesome as it was a few months ago."

"Some investors are unconvinced by the latest run in stocks, however. As of Wednesday, investors had pulled $9.8 billion over the prior seven days from mutual funds that focus on U.S. stocks."

Yet if you read the Ignites article today based on that AP article ("Returns Bounce Back in 1Q"), the focus is squarely on the positive. And Ignites is not alone. The asset management and insurance industries seem manically focused on finding reasons to believe that the end of the financial crisis is in sight and that things will return to the days of 35+% profit margins. I hate to be the bearer of bad news, but the executives who think that things will go back to the way they were a year ago are deluding themselves. While I am optimistic about the future of the economy over the long-term, all evidence points to a tough haul in the short-term.

And regardless of the direction that the markets take over the coming months, industry executives must recognize the fundamental changes that the market crisis (and related changes such as broker/dealer consolidation) is bringing about. The firms that will succeed - during the crisis and beyond - are those that reexamine their business models (from wholesaling structures to product development processes, from compensation plans to online marketing strategies). Looking back, I think that we will view the crisis as the wake-up call that our industry needed.

Hybrid Wholesaling Works Says "Sales Success of the Year"

by Mike Ma

For those of you who weren't at the 16th Annual Mutual Fund Awards last Thursday, Ivy Funds was named the "Sales Success" of the year. Hybrid wholesaling was one of the major reasons cited for the success. From Fund Action's coverage on Friday:

Much of the success of the fund was due to sales in the independent broker/dealer channel. Butch and Ross last year helped to supervise the creation of that channel, adding 10 wholesalers to its team to focus on the independent channel. Six of those wholesalers are hybrids that split their time between the internal sales desk and the road, helping Ivy Funds to save money--the average hybrid wholesaler makes $124,000 a year, while the average external wholesaler makes $372,000, according to a study by kasina.

The stuff works. Let me know if you'd like to know more about our research and work in this area. I'd love to talk with you more.

Embracing Change: If I can Twitter...

by Deb

For all of you that have received hundreds of emails from me over the years, you know that I am sold on the benefits of email and the cutting-edge technology of my Blackberry. However, as the newest member of the kasina team, probably the least tech savvy and certainly the least likely to figure out my own iPod, I have spent a lot of time getting up to speed on many new Web 2.0 technologies. I am learning a totally new vernacular including such new buzz words as: Skype, Twitter, IM, wiki, etc. "What are these tools and how could they possibly help build relationships?", I thought to myself. At first blush, it seemed counter-intuitive to me that any technology could enhance the value of human contact. How could you replace the value of the face-to-face meeting or the phone conversation?

At kasina, we are spending a lot of time focusing on the ideal balance between external, internal, hybrid, National accounts, and Web touches for an asset manager - a formula that reduces costs yet maximizes the asset gathering proficiency of your advisors. The Web, and Web 2.0 tools, are proving invaluable to asset managers - oh, and to me too. Many of these new tools, which initially seem impersonal, are exactly the opposite - they enhance your connections and lower your costs. For example: sitting on an hour-long teleconference call will challenge anyone's attention span. Attending the same call via Skype is an entirely different experience, and one that is much more productive. The attendees are engaged in the meeting and can see the always-valuable facial expressions and body language of the other attendees.

My advice for wholesalers on the road? Start out using Skype to keep in touch with your family. Then imagine how useful it could be with your customers too.

So your next "email" from me may come on Facebook, LinkedIn, or even Twitter. If I can do it, so can your wholesalers.

Beware Focusing Heavily on the High End Advisor in a Downturn

By Mike Ma

In the downturn, I have talked with a number of distribution executives who are turning their attention to the high-net worth advisor, many of them RIAs. I urge some caution before getting too enamored with this strategy and I'd like to present an alternative.

Although this path is often argued to be attractive, we have to be realistic about the historical difficulty asset managers have had selling to this market in good times. Few firms have the products that these advisors want, and if they do, chances are they are already working with them. Advisors will call the manufacturers, not the other way around.

Clearly, creating a viable market entry strategy for high-end advisors is likely to be a mess if you are starting from square one in 2009.

I'd like to present a better alternative in times of near nuclear-level restructuring of the advisor market - to figure out mid-market sub-segments of advisors who will be around after the nuclear fallout, and get there first. An outstanding article in this month's Harvard Business Review that echoes this point, Value-for-Money Strategies for Recessionary Times (free).

The article highlights some best practices, and a good deal involve intelligent segmentation strategies that may hit the low end.

• Haier, a low-end player in the appliance market, cornered a significant, profitable portion of the refrigerator market too by catering to the needs of wine enthusiasts.
• Zhongxing Medical crippled GE and Phillips with low-end product and pricing strategies on mid-market radiology imaging machines.
• Acer Computers focused their laptop marketing toward airport business travelers while Dell is still taking out ads in newspapers.

While the examples outside of our industry go on and on, we might consider similar strategies we are hearing in our industry. Comments made during Steven's panel at NICSA by Bill Dwyer, President, Independent Advisor Services at LPL, indicated that they are focusing on a lot of advisors in non-urban areas were these advisors are very important to that community and they can be profitable in their model, even with production less than $300,000. Theory is that these could be forgotten targets that could withstand the storm ahead.

Finding these advisor segments are more likely to produce long-term value for money to the shareholder, and frankly as an asset manager, at least thinking for a bit outside the high-end advisor box might bode good things and long-term success.

Time to Reconsider Hybrid Wholesaling as a Value Proposition

by Lindsay

Last summer, kasina published a report on hybrid wholesaling, laying out a call to action for firms looking to trim their costs and increase the productivity of their wholesaling forces. When that report was released, the Dow Jones was still above 11,000 (and we were whining about it), the S&P 500 was still above 1200 (and we were whining about it), and people were doubling down on investments in index funds and financial services stocks thinking they were getting a pretty sweet deal (wait, was that just me?).

Fast forward 6 months, and we've watched the Dow fall below 7,000 for the first time in well over a decade (ouch), and have seen financial services industry titans cease to exist or hand over the reigns to the U.S. government, in exchange for bailout dollars. In the asset management industry, record levels of redemptions have led to consolidation of both broker-dealers and product manufacturers, forced firms to rationalize their product line-ups, and led to identity crises across the industry.

On the distribution front, asset managers are slashing budgets at a time when communicating with advisors to rebuild trust is more important than ever. In a survey of National Sales Managers in the fourth quarter of 2008, 42% reported that they had already reduced their wholesaling forces in response to market conditions, and kasina's research in the first quarter of 2009 indicates that many firms have made additional cuts.

How, then, can firms continue or increase advisor communication, when sales budgets and ranks of external wholesalers are falling? The answer, simply, is hybrid wholesaling, for several reasons:

• It's cheaper: Average total compensation for hybrid wholesalers is 40% of that for traditional external wholesalers, and T&E budgets are lower, due to less time in the field.
• It's effective: Average total production for hybrid wholesalers is 50-100% of that for traditional externals.
• It's flexible: Firms can pick and choose territories, or groups of advisors, that are particularly well-suited to hybrid support, so that, for example, highly-paid externals are concentrated in major metropolitan areas, while hybrids support advisors in less productive or remote territories with a mix of in-person visits and phone or Web-based interactions.

The asset management industry's approach to intermediary sales is long overdue for a makeover. Now is the perfect time for firms to rethink their sales strategies, and move to lower-cost, higher-efficiency models that will continue to serve them well when the markets recover and the asset flows turn positive.

The Future of Global Distribution

by Steven

My panel at NICSA's Annual Conference discussed the future of global distribution, focusing on the shift of power from the product manufacturers to the distributors.

My panel members represented three of the most important segments of the business:

• Joe D'Agostino (Citi Global Wealth Management Investments) - one of the three banks that are replacing what we today refer to as wirehouses
• Bill Dwyer (LPL Financial) - the largest independent broker/dealer in the US and one of the beneficiaries of the advisor migration from the wires to the RIA and independent channels
• Paul Feeney (Bank of New York Mellon Asset Management) - one of the global product manufacturers who will distribute through the above firms

Below, please find my slides. If you find the slides too cryptic please post a comment and I will walk you through them.

Americans Want to Talk About the Financial Crisis

by Corianna

People want to talk about the financial crisis. Communication is key. We've been talking about it and blogging about it for months now.

Last week, some new numbers from Pew affirmed the importance of everything we've been saying. According to Pew, Americans:

• Are beginning to hear good news: Compared to December, the number of people saying they are hearing mostly bad news has dropped from 80% to 60%; meanwhile, the number saying they are hearing a mix of good and bad almost doubled from 19% to 37%.
• Want to know what's going on, good or bad: 91% of Americans following economic news very closely report feeling better because they know what's going on; whether or not it's good news. 79% of Americans who follow less closely feel the same way.
• Feel under-informed: 40% of those following the news closely feel they don't have enough background knowledge; 54% of those following less closely share their sentiment.
• Care more when they make more: 83% of Americans with household incomes above $75,000 and 64% of those with household incomes of less than $30,000 say they need to stay abreast of economic news for financial reasons.

In today's scandal-stricken world, asset managers must not take their positions as trusted investment consultants for granted. People want information, and more of it; no huge surprise there. However, with the ever-expanding blogosphere and a plethora of news publications, the competition for investor attention is intense. Today, more than ever before, transparency, easy access, and timely publication will be paramount. Asset managers would do well to go to their audiences through syndication (e.g. disseminating content through other sources; having portfolio managers featured on news shows, etc.) and new media communications, rather than waiting for investors and advisors to come to them.

Broken Trust in the Asset Management Industry

by Steven

Tyler Mathisen asked the Face the Membership panel at NICSA's Annual conference if the asset management industry has broken the trust of their investors.

The panelists did not feel that their firms had done anything to break investors' trust. For firms that did break investor trust, the panelists felt that they now need to clearly communicate their firm's investment philosophy and process, and focus on what they are good at.

That many firms did not break a trust is technically true. Fund companies always say: "past performance is no indication of future returns." The problem, however, is that investors were not prepared to lose 40% (or more) of their portfolio. Investors feel that an implicit trust was broken. The industry now has to gain back trust if it wants investors to reinvest in their funds.

Maximizing RIA Interactions

by Michelle

Today, Ignites reports on a recent survey by Charles Schwab on RIAs prizing communication more than ever. Proactive communication, support from custodians and product manufacturers, investing in new or improved CRMs, help with managing client expectations, a focus on investment approach and strategy, and targeted email were all cited as increasingly important to advisors given the volatile and competitive environment.

An additionally important segmentation point, one of many in kasina's "Maximizing Advisor Interactions: Dos and Don'ts for Wholesalers" report, released in December 2008, is an understanding of team roles and sizes.

As the slow but steady shift in the advisor landscape to the RIA (and independent) channels continues, firms should be reminded that the traditional solo advisor is becoming less prevalent in all advisor channels, particularly with RIAs. Of advisors surveyed, over 50% of RIAs reported working in teams of four or more.

As teams become more pervasive, so does specialization within the teams, and understanding an advisor's specific role is critical to understanding what he or she will be receptive to in a wholesaler meeting. An advisor who works on a team as an investment specialist might be most interested in understanding how a product fits into a portfolio, or what the portfolio manager's process entails, while another advisor on the team who focuses on business development would be the appropriate target for sales ideas or discussing partnering with a wholesaler to host topical seminars for potential clients.

Awareness of these characteristics is key to establishing an appropriate and fruitful RIA service model.

Compensation for the Long Term: Not Just for PMs

by Mike McLaughlin

David Kathman over at Morningstar wrote an interesting article this week about portfolio manager (PM) compensation. In short, Kathman lauds firms who align PMs with long-term performance and shareholder benefit.

The faculty of New York University, in their Restoring Financial Stability whitepaper series, applies the same concept to compensating executives and "risk-takers" in financial services companies.

The issues raised by both Morningstar and NYU have parallels within distribution, specifically for wholesaler comp. Wholesalers clearly fit the "risk-taker" label, and yet, for most firms, their pay is largely a short-term vehicle. Consider:

1. Monthly commissions condition wholesalers to think short-term. If I had a nickel for every wholesaler I've heard mourn the haircut in his monthly commission check over the last few months, I'd fear not the financial crisis.
2. Deferred compensation plans industry-wide are generally weak. As we've written, deferred packages for externals often comprise 10-15% of total comp. This enables good wholesalers to move liberally when better near-term opportunities arise.
3. Wholesalers face no direct financial penalty for bad outcomes for the advisor and shareholder. An underperforming product takes time to reveal itself after a purchase. And the wholesaler has the market and the PM to bear the brunt of the responsibility. By the time a relationship dries up, the commission check has long-been cashed, new relationships forged, and maybe even a new job found.

The idea of going more long-term got me thinking about a client of ours. They had a unique structure for wholesaler comp: base salary and an annual bonus. Monthly commissions? Nope.

As you might guess, the sales team was not boisterous in its support for this strategy. And at first I sympathized with them. But I now think the firm was more right than wrong here.

Sure, the firm had the substantial challenge of being an outlier in an insular industry where non-standard approaches are met with great skepticism. But they were attempting to plant a longer-term mindset within the sales team. That is a strategy I can support.

So what new ideas are out there for creating better comp structures for the long-term? We are all ears to hear yours, and we'll throw out a few of our own next week.

Highly Productive Organizations

by Anu

Happy New Year! It's a natural time to reflect on 2008 and begin considering the impacts we would like to see on 2009. I took the time to go through last year's travel plans. I spent time on-site at 9 asset managers throughout the US. What are the keys to success over stagnation? How can firms break through and win market share? These and similar questions gnawed at me over break.

And somewhere between New Year's Eve's roast duck (remember low and slow with whole birds) and the Rose Bowl crudites, I realized there's no answer, not even a complicated one, that can match each firm's unique objectives.

I have two important insights.

First, it's a thin line between success and stagnation. Often the line isn't crossed due to a lack of organizational inertia. Time and again I heard things like, "Our compliance won't allow us to do that," or "Our FINRA analyst is especially rigorous." When I probe and ask if other options were explored, most often they were not.

There is only one universal success-killer: Ego. That's a matter better suited for the philosophers at kasina (Mike, Corianna, care to chime in?) than me. Countless times, I saw actions and plans designed to grow a career not AUM. Maybe it's natural. It's probably human nature. But some rare and unique organizations have developed a team of low-ego, highly-motivated leaders (can you see the two-by-two), and are winning in the marketplace because of it.

For example, I spent considerable time in 2008 with a firm that is the industry-leader in a specific investment discipline. We collaborated over six months to create an all-channel, global Web strategy. Near the end, a new Marketing leader arrived, created a culture of fear internally, and decided to go a different direction than the kasina/team one. None of his new direct reports felt empowered to rise above his ego to support the half-year of work. Further, the functional team has spent the last six months stagnating as they await the "different direction." It's an example I'll keep for my personal leadership as well as steering clients.

What We Sell: Investment and Distribution Professionals

by Mike

I was on the Royce Funds site last week. Tooling around, one tidbit generated a strong reaction from me.

Chuck Royce manages or co-manages fifteen open and closed-end funds. Fifteen!

A few questions immediately popped into my head:

• How can he effectively manage fifteen portfolios? I know his firm has a small cap focus and employs 29 investment professionals, but I wonder how Mr. Royce's expertise can be fully applied across fifteen distinct products.
• Do financial advisors realize this and/or care? Financial advisors might only know if Mr. Royce manages the products they utilize, not the full scope of his responsibilities. Or maybe they know, but primarily value having the man that is the brand attached to their clients' assets.

Let's table the issue of portfolio manager scale (though it will be revisited). After my initial questions, I spent more time thinking that this situation presents an important a marketing question.

As an industry we speak in the language of products: new ones, ones that close or merge, and, of course, ones that are performing particularly well or particularly poorly.

What I like about Royce's site and brand is that it is first and foremost about people. The assets under management included in the firm profile hasn't been updated in more than a year. But the profile for Charlie Dreifus has already been updated this month to reference his recent 2008 Morningstar Manager of the Year award.

This prioritization is something most firms miss. Collateral and Web sites focus on products. Performance figures (not a guarantee of future results, of course!), Morningstar/Lipper rankings, and stock photos of retirees and middle-aged professionals walking the beach are the stock of our marketing trade. PM profiles are typically non-existent or minimalist and dry, including nothing about what makes them interesting as people.

Aren't people what advisors and investors are buying? The asset management vehicle is one that packages the ideas, expertise, and personalities of people who oversee and distribute them. I mean, is there a Head of Distribution out there who wouldn't argue that a vital reason for a firm's success lies in the wholesalers, who last I checked make zero investment decisions?

It's cliche, but people are firms' greatest, and in many cases only, asset. And while balance is needed to minimize the damage of turnover and other personnel issues, this asset needs to be more of a focal point when it comes to marketing. And not just the investment management talent, but everyone.

A switch to selling people, not products, suddenly makes attaching Chuck Royce's name to fifteen portfolios seem pretty savvy.

Happy New Year

by Steven

I hope all of you had some time over the holidays to catch your breath. I caught mine in Chile, enjoying the beautiful climate and wonderful wine. But, coming back to NYC has not been easy. The financial climate has not gotten any better and the industry is still facing major obstacles. Here are my thoughts on how the current crisis is transforming our industry's distribution landscape:

Getting the Most From Your Wholesalers in 2009

by Lee

In our latest report, "Maximizing Advisor Interactions: Dos and Don'ts for Wholesalers," we lay out a series of recommendations for wholesalers based on insights from an extensive survey of 343 advisors and a series of in-depth follow-up interviews. The key steps, which most wholesalers fail to take today, are:

• DO Focus on Segmentation: A one-size-fits-all wholesaling model does not work. 80% of interviewed advisors believe that most wholesalers do not segment their advisor bases or attempt to customize their messages based on what is relevant or of interest to the advisor. At firms where advisor segmentation is being used, wholesalers should be given extensive training on how to use information on the segments to tailor their approaches going into advisor meetings. Whether or not firms have holistic segmentation strategies in place, however, wholesalers should be using all resources at their disposal to learn about each advisor's business before going into a meeting, in order to make the meeting as relevant and useful to the advisor as possible.
• DO Be a Product Consultant, Not a Salesman: While 91% of surveyed advisors said that it is helpful when wholesalers recommend specific products, 100% of interviewed advisors cited product "pushing" as their biggest wholesaler pet peeve, so wholesalers need to know the difference and be capable of doing the former without doing the latter. An advisor should feel that he is receiving customized advice on what products will meet his particular needs, rather than the same generic product pitch that the advisor before and after him is receiving. Wholesalers should assess an advisor's current needs, concerns, and knowledge gaps, and then be honest in their recommendations, saying if their firm has a product that can fill a specific niche, but admitting if their firm does not, or if a competitive product is a better fit. Winning an advisor's trust is more important, in the long run, than any single sale.
• DO Provide True Business Building Support: 74% of surveyed advisors said that whether or not a wholesaler "understands and helps me with my business-building needs" is either "very important" or "somewhat important" in determining whether they continue to meet with that wholesaler. However, many wholesalers today continue to simply drop printed copies of value-added programs on advisors' desks without helping the advisor to apply the program's tenets to her business or providing tailored support based on the advisor's specific business needs. Wholesalers should help advisors with their prospecting, client communication, and client retention efforts. Additionally, the movement of many advisors toward the independent channels presents an opportunity for wholesalers to provide advice on managing an advisory practice without the infrastructure and support that they previously received from their employers.
• DO Continue the Dialogue Between Meetings: After meeting with an advisor, wholesalers should make sure to follow up. Interviews with advisors revealed that many are dissatisfied with the lack of follow-up from wholesalers after their quarterly or semi-annual meetings. As one advisor put it, "If the only time I spoke to my clients was during meetings, they wouldn't be my clients for very long." 91% of advisors do want wholesalers to follow up via their internals, and 55% expressed a preference for e-mail follow up from internals. In keeping with the universally expressed desire for a more consultative wholesaling model, maintaining an ongoing dialogue between the firm and the advisor is essential to building a productive and enduring relationship.

If you can institutionalize these steps and ensure that your wholesalers follow them, you will stand a far greater chance of hitting your targets in 2009.

Understanding Independent Financial Advisors Can Stem Redemptions

by Steven

Redemptions in mutual funds are expected to surpass $325 billion in 2008 and asset managers have started to focus their distribution strategies around the growing independent channel for salvation.

There are many reasons why it makes sense to focus on independents. One of them is lower redemptions. The average redemption rate in the independent channel has been between 10 and 15%, as compared to 20% in the wires.

But our recent focus group with independent financial advisors has shown that they are frustrated with the lack of understanding that wholesalers and marketing organizations have about their business. At the same time, interviews with some of the leading independent advisory firms have revealed that successful wholesalers understand the difference between independent and wirehouse advisors.

One of these differences is that independents typically do not have the support of an advisor network. Wholesalers that understand this have organized events where independents (often from the same firm) get together to share best practices. These events have been highly successful both for the advisors and for the wholesalers.

Two steps that firms can take to better understand the needs of independent advisors are:

• Conduct Regional Advisor Focus Groups
  These focus groups can help firms understand the varied sophistication levels and preferences of advisors.
• Capture Key Data Points
  Capture key demographic, behavioral, and attitudinal information (Service by Segmentation) such as:

1. Demographic Data
• Maturity of the practice
• Team or individual practice structure
• Number of clients
• Revenue structure
• Licenses and designations
2. Behavioral
• Accepted calls from an internal wholesaler in last four quarters
• Meetings with an external wholesaler in last four quarters
• Open and click-through rates for e-mails
• Literature requested through each communication channel (Web, e-mail, telephone)
3. Attitudinal Data
• Rating of value-added programs
• Willingness and frequency to receive calls from Internal sales
• Willingness and frequency to meet with a wholesaler
• Rating of conference and networking events
• Preference to have firm information pushed to them (via wholesaler, marketing, or Web)

Redemptions are going to continue to plague asset managers and insurance companies. Better understanding independent advisors will help your wholesalers and marketing departments have more relevant and meaningful interactions, which will ultimately help with redemptions.

Presentations on Why e-Business is Sales, and Sales is e-Business

by Mike Ma

I've made this point many times, but I wanted to share some recent client presentations that demonstrate clearly why now is the time for e-Business initiatives, not retraction.

Let me know if you'd like me or someone from kasina to talk you through these points.

Twitter for Asset Management, Are You Kidding Me?

by Steven

When I first heard about Twitter - an online tool for instantly sharing short updates and following others who do the same - I wondered who would ever want to do that, and thought it would be a waste of time. But I've been testing it out for a while now, and after listening to some of the discussions at our recent e-business roundtable, I reconsidered, and realized it could be a great internal tool for wholesalers and national accounts managers.

How Does Twitter Work?

Twitter users have 140 characters to answer the question, "What are you doing?" If you join Twitter you can "follow" others who also post. You can also direct message them, but always in 140 characters or less. Twitter interactions can be viewed and updated on the Web, through desktop apps, and on mobile devices. It's a way to quickly share information without having to send mass-emails.

Twitter for Wholesalers and National Accounts Managers (NAM)

Simply speaking, Twitter is a communication tool. Wholesalers frequently talk or email each other about successes they had with an advisor or a fund that they tried to promote. Rather than sending these successes as a long sentence or comment in the header of the email - I know you guys do that - wholesalers and NAMs could use a tool like Twitter to post these successes and follow them throughout the day.

The advantages of Twitter over email are:

• Every wholesaler in the organization has access to it


• Stored in a central location


• Searchable for future reference


• Limited to 140 characters to ensure concise messaging

If you're still wondering whether asset managers would really find this useful, I would suggest testing it out. This quick and easy service could provide a leg-up for the next generation of successful and progressive wholesalers and NAMs who depend on networking and the internet to facilitate communication.

Never Allow A Crisis to Go to Waste

"Rule one: Never allow a crisis to go to waste" - Rahm Emanuel

By Steven

The industry has already lost $1.3 trillion in assets under management in the first three quarters of the year. Distribution teams are responding by cutting the bottom performing wholesalers. Organizations are taking this opportunity to reassess their wholesaler territory strategies, and focus on understanding the difference between overall territory potential and the actual impact of the wholesaler. Understanding this difference is fundamental to a successful wholesaling strategy.

To better assess territory and wholesaling potential, we recommend that firms:

• Acknowledge that the territory and the wholesaler are not one and the same - 50 percent or more of incoming assets within a given territory may be derived from advisors that the wholesaler has never actually engaged.


• Apply more rigor to the analysis of wholesaling opportunity - Firms can incorporate information from National Accounts and supplement it with data from outside vendors, such as Coates Analytics, IXI, and Discovery Data.

Once firms understand the underlying potential of their territories, they need to improve upon how they evaluate their wholesalers. We found that the following steps lead to success:

• Compensating for wholesaler alpha - Pay wholesalers for lower-than-average redemptions in their territories. This can be done simply by taking the average redemption rate for the firm and paying wholesalers that have fewer outflows then their peers.


• Matching the wholesaler evaluation metrics to the sales goal so that both are grounded in wholesaling potential - Separate assets derived through wholesaling contact from those acquired without wholesaling contact. Pay only on the assets that wholesalers influenced.

87 percent of Sales managers do not know the percentage of assets coming in through a given territory that results from the efforts of wholesalers. This is often the cause for underperforming Sales teams. Take advantage of this crisis by redesigning your territories, and reevaluating the way you measure and compensate your wholesalers.

Servicing Independent Advisors with Hybrids

by Lee

Last week, Steven wrote about the increasing shift of advisors from the wires to independent broker/dealers and how many asset managers have had success servicing these reps with hybrid wholesaling. As many firms are now looking to expand (or start) their wholesaling efforts to the independent channel, I wanted to dig a little further into this topic and tackle three key hybrid-related issues:

• Activity: Hybrids should operate primarily from the firm's home office (or from their home), using the phone, e-mail, and Web-based tools to engage advisors. While they should meet with advisors in person, limiting travel to ~35% of the time will provide the biggest bang for your buck.
• Sales Goals: Hybrid wholesalers tend to have sales goals that range from 50-100% those of externals. When focused on the independent channel (especially if a firm is a new to that channel), I would expect a sales target at the lower end of that range.
• Compensation: The average hybrid wholesaler makes $124,000 ($64K base and $60K in commissions/bonus), while at the top end, some firms' hybrids are making $250K. Given the uncertainty of hybrid wholesaler sales targets, especially in a new channel, I would recommend creating a structure in which the commissions make up a smaller percentage of wholesaler compensation relative to the base and bonus.

As we saw in our recent survey of National Sales Managers, firms are planning to expand their hybrid efforts, and we've seen many of those efforts aimed at the independent channel. In order to ensure success, firms must have a clear strategy for who they are going after, what they expect their hybrids to do, and how they are going to compensate those individuals. The firms that have figured this out have been able to achieve significant increases in wholesaler profitability while bringing in a great deal of assets.

Following the Signs of Change

By Steven

The signs are clear, but few firms are reacting accordingly. The financial crisis is forcing firms to react and make changes to their short-term and long-term strategies. The two most important trends that firms need to consider are:

1.The increased importance of the research analyst at wirehouses
2.Further migration of advisors to independent b/ds or creation of RIAs

1. The increased importance of the research analyst at the wires - We see that the largest distributors continue to consolidate. These consolidations only further the importance of the research analysts in the product selection process. The remaining wires and associated banks are going to rely further on process, rather than individuals picking investments for their clients. Assets are going to flow through packaged products and select lists rather than individual mutual funds.

Surprisingly, only 30% of firms are expanding their National Accounts teams, while 40% are planning to increase their wholesaling force. If the average cost of an external wholesaler is $372,000, while the average cost of someone in National Accounts is $250,000, the math is clear: firms should reallocate their resources to their National Accounts teams.

2. Further migration to independent firms or creation of RIAs - We will see more of the large advisor teams move to create their own RIA, or move to an independent broker dealer, such as LPL. These advisors want higher payouts and more investment discretion, which they can't get under the wirehouse structure.

These signs are directing product manufacturers to create a dedicated RIA sales force as well as reallocate some of their wirehouse-focused wholesalers to the independent channel. Successful RIA sales teams usually operate much more like a National Accounts team, due to the institutional nature of the sales. On the independent side, firms have been very successful with hybrid teams. In the worst case, a hybrid will get 50% of the production at 50% of the cost. In a best case scenario, the hybrid will yield the same production as an external for roughly one-third the cost.

The financial crisis will divide the winners from the losers. The firms who best read the signs, and who make the right short-term and long-term decisions in response, will be the ones to come out stronger after the crisis.

Create Scale Instead of Layoffs

by Steven

Use this tough market to reshape your distribution strategy for success--you will be appreciated if you can save money and increase production.

Though you may receive orders to cut people from your distribution organization, a better approach would be to use this opportunity to change your strategy to a more scalable distribution model. Here are three things to consider:

1. Cut your worst performers - Every distribution organization has three categories of sales people: Top Performers, Average Contributors and Laggers. Don't be afraid to fire the laggers. Everyone within your organization knows who they are, and your performers will feel motivated that your organization does not tolerate under-performing sales employees.
2. Redesign your territories - You will now have a few open territories. Redesign your overall territories to better capture the actual underlying opportunities. The outcome might be that your top performers get bigger territories, which they will welcome, or they might receive some support from hybrids, thereby bringing in additional assets.
3. Create a hybrid team to fill the void that was created. It is most effective to use hybrids in a way that best supports each individual territory. For example, for territories in rural communities with fewer opportunities, a sole hybrid might make the most sense. On the other hand, taking full advantage of the opportunities in money center territories might require adding a hybrid to an existing external/internal tandem.

The opportunity is clear. Replace $378,000 (average external wholesaler cost) with one or two hybrids at $124,000 each (average hybrid wholesaler cost). In the worst case, a hybrid will get 50% of the production at 50% of the cost. In the best case, you will yield the same production as an external for roughly one-third the cost.

This is the time for distribution organizations to reshape their business and finally become more scalable.

Buffett believes in long-term growth

by Steven

The industry needs to prepare itself for a tough year, but there is long term prosperity awaiting the surviving firms.

Industrial production fell to its lowest level in 24 years and unemployment claims are at steep-recession levels. All signs point to a deep economic downturn that will be much harder than most Americans can imagine.

The consequences of this negative short term economic outlook will be a challenging year for the asset managers resulting in weak flows and declining margins.

There is good news, however. As Warren Buffett said today in the NYTimes: "'What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. But fears regarding the long-term prosperity of the nation's many sound companies make no sense," he said.

This is important for two reasons:

• The equity markets will recover faster than the real economy
  
• Sound asset management and insurance companies will come out of the mess stronger than ever before
  

Fundamentally strong firms should be willing to sacrifice short term profit margins for long term success. It is paramount for asset management and insurance companies to weather the short term without crippling themselves in the long term.

Cutting Fat - What Part of the Budget will be Cut

by Steven

The Dow went down another 3.6 percent on Monday and fell below 10,000 for the first time in nearly four years. The downward spiral of the economy will affect the budgets of distribution organizations.

Distribution heads are reluctant to cut wholesalers. The consensus at our latest Distribution Roundtable was that due diligence meetings were the first to go.

In recent years the cost of bringing an advisor to Boston or NYC has skyrocketed. Most firms had budgeted $1500 per advisor, but that is no longer possible. In working with our clients we found that those meetings were not very well-executed and rarely drove significant assets.

Firms are also being more diligent with the use of outside speakers. Some firms have started to charge the wholesaler for the speaking fees. The effect has yielded better qualified advisors and superior utilization of the speakers.

It is hard to predict when the market is going to flatten. In preparation, Distribution teams should cut what doesn't add significant value.

Advisors Are Not Panicking

by Steven

Even though our lawmakers didn't seem to be able to get it together yesterday, it is a positive sign that advisors are not fully retreating from the markets. In the kasina survey released September 26, 2008, 29% of financial advisors said that they are investing more in equity funds, while only 24% reported that they were investing less as a result of the current market conditions.

It's also good to see that the Treasury Department's announcement to create a temporary insurance system for money funds reestablished confidence among advisors. 37% of advisors prefer to park their clients' money in money market funds right now.

Furthermore, we found that more advisors are increasing their investments in bond, equity, and money market funds. Variable annuities and alternative investments, however, are not faring as well. 22% of intermediaries are investing less in VA's, while only 16% are investing more. Additionally, 31% of intermediaries are now investing less in alternative products (130/30, hedge funds, etc.), while only 14% are investing more.

The reason behind their optimism is not quite clear. One reason might be that most advisors weren't alive during the Great Depression. Therefore, unlike their parents and grandparents, they are unable to imagine the worst.

Hopefully, lawmakers will get it together today and pass the bailout. Advisors are going to benefit from avoiding panic in this market environment.

What Is Going On? The Impact of the BofA/Merrill Merger

by Steven

With their industry in turmoil, asset managers are trying to understand what distribution changes they will need to implement.

It is likely that the mergers will continue. Morgan Stanley and Goldman could be next. The Merrill/BofA merger creates the world's largest brokerage unit, with more then 20,000 advisors and $2.5 trillion in client assets. A potential Morgan Stanley/ Wachovia merger will further consolidate financial advisory firms.

What does this mean for asset managers?

• Large brokerage houses will exercise more control over their financial advisors' investments. They can't afford to let advisors make bad decisions on behalf of their investors.
• More asset management sales will be driven by national accounts rather than by wholesaling. Due to the control of these centralized investment units, more sales will come through pre-set asset allocation products than through individual mutual funds.
• Wholesaling will shift more to the independent channel. With less control over sales at the wires, wholesaling will have a bigger impact at the independents.
• Wholesaling cost structures will be strictly evaluated. This will force the issue of hybrid wholesaling -- most firms will find that hybrids are a more cost effective way to sell to a disbursed advisor pool.

In troubling times like these, many analysts talk about a longer down market. A down market will only further intensify the competition for assets. Asset managers will have to seriously rethink their distribution strategies in order to win assets.

Are Retail Fund-of-Funds the Next Product Development Wave?

by Lindsay

When kasina wrote about the Future of Distribution at the end of 2007, product development emerged as a key issue at or near the top of most distribution executives' minds. While the vast majority of funds available to retail investors currently reside within one of the nine Morningstar style boxes, 73% of interviewed executives indicated that 2008 product development efforts would be focused on products not available in the market today (November 2007).

It's now September 2008, and the wave of new, differentiated products has yet to hit the market. Exchange-Traded Products (ETPs) have continued to proliferate, structured notes and 130/30 funds trickle out, but truly differentiated product offerings are few and far between.

One bright light in the product development landscape, however, is Janus' recently launched Janus Adviser Modular Portfolio Construction Fund (JSMPX). This Fund of Funds couples many product types popular with institutional investors, such as ETPs, alternatives, and derivatives, with more traditional mutual funds to provide exposure to investment vehicles usually unavailable to retail investors, while maintaining adequate diversification for a retail investor.

As fund companies try to lure risk-averse but performance-hungry investors back to the market, well-diversified funds with exotic components may turn out to be the products that strike the right balance. I suspect some copy cats will show up on the scene.

Net Promoter Score for Wholesalers

By Steven

Wholesaler performance is easily measured by looking at incoming sales. The difficulty lies in determining a course of action when both performance and sales are low. How can we judge whether the problem rests in the wholesalers and their processes, or if the products themselves are impeding positive sales?

As the result of recent discussions with our clients, I have started to judge wholesaler performance using more than the obvious metric of sales performance. I have also begun asking advisors this question: How likely is it that you would recommend the wholesaler to a friend or colleague?

The responses to this single question generate a Net Promoter Score, a concept that was first introduced in a 2003 article in the Harvard Business Review. Based on their responses to this question, customers are categorized into one of three groups: Promoters, Passives, and Detractors.

Promoters are valuable assets. They drive profitable growth through repeated or increased purchases, loyalty, and referrals. Detractors, however, are liabilities. They destroy profitable growth with their complaints, reduced purchases, defection and through negative word-of-mouth.

The Net Promoter Score is calculated as follows:

% of Promoters - % of Detractors = Net Promoter Score (NPS)

In this volatile market environment, the Net Promoter Score can effectively measure and motive wholesaler performance.

Segmentation: Build for Future Growth Before Someone Else Does

by Anu

There's a solid stack of data that says the single most important endogenous variable in determining a firm's profit is that firm's investment in marketing and sales. So it was a surprise to me that more than three-quarters of the marketing executives we interviewed for "Service by Segmentation: Matching Service to Advisors" said that while they recognized the value of segmentation, they didn't actually do it.

When asked why, they usually cited lack of data -- either they can't get it, they can't get data they can use; or when they can get it, they can't execute on it. We know, anecdotally, that there's some basic segmentation going on in the intermediary channel, because occasionally, we talk to each other about it, but we also know that segmentation, which is an absolute given in every other branch of financial services (to say nothing of other, even more advanced segmented industries like consumer packaged goods), is still an optional and not a mandatory first step.

Like a lot of other aspects of asset management, we suspect that this is nothing less than inertia from an old way of doing business, in this case, specifically, treating advisors as a monolithic group. Everybody knows that advisors vary wildly in their business needs, attitudes, preferences, and behaviors, but for decades now, the US asset management industry has been able to make money without differentiating much from the 54-year-old advisor in Sheboygan with the mostly suburban, white collar household clientele, versus the 34 year old in mid-town Manhattan with a portfolio full of single career professionals on the brink of 7- and 8-figure salaries. We think the fluid competitive landscape is going to push a change here: very complex firms deeply acculturated in data-driven segmentation are going to change the playing field for the incumbents, and we want to get in front of those conversations.

"Service by Segmentation" is kasina's point of departure for these discussions: How does the modern asset management firm organize a segmentation scheme to optimize its research, marketing, and sales dollars? How long does it take, how much does it cost, how do I procure the budget and the mandate? What's the return for us? How much data do I really need to protect or grow my margins? If your organization hasn't asked these questions lately, the time is now. The winners in the next decade will lay the groundwork in the next few years.

Can Asset Managers Buy Their Way Into International Expansion?

by Corianna

Expansion in the retail banking industry and the asset management industry depend on the presence of the same conditions:

• An untapped or developing market
• The establishment of a regulatory environment
• A robust financial infrastructure

And, already, the local action is heating up in the banking sector. Take China's banking sector, for example. Firms like HSBC, Bank of America, Citigroup, RBS, and Newbridge Capital Ltd. have been buying up shares of Chinese banks.

Meanwhile, in the US, fund companies are becoming cheaper. According to a Bloomberg article two weeks ago, the valuation of asset management firms has dropped by over 35% since the second quarter of 2003. And, should Lehman, Wachovia, and National City Corp follow through on their threats to put their asset management businesses up for sale, the price of asset managers will probably drop even more.

What does this mean? Well, there's a silver lining to every cloud (or so I've been told) and it's looking like a buyers market for domestic asset managers. On September 8th Fund Action reported that Fifth Third Bancorp is selling its municipal bond funds to Federated Investors. Allianz is also apparently on the prowl for new acquisitions. If the trend spreads overseas, a golden opportunity may be taking form for asset managers looking to follow in the footsteps of internationally expanding retail banks.

Many firms with an appetite for international expansion are focusing their efforts on taking their own home-grown brands and products abroad. These firms should also keep a look out for:

• International acquisitions and investment opportunities
• Domestic acquisitions of brands or products particularly well suited for international markets

After all, the early bird always gets the worm; or so I've been told.

Taking a Chance on the Web

by Anu

In our study, "Your Site Can Sell, Too," kasina surveyed advisors across channel and demographic data. Across channels, 15% of advisors said they preferred to use electronic communication in lieu of Wholesaler interaction. Did you hear that? Some advisors do not want your Wholesaler to visit! They are asking you to save your money and frustration.

But are firms listening? In subsequent conversations, few firms are considering wholesale (yes, pun intended) changes to the service model for 2009. A simple idea: test your online power. Gather all the advisors that you did business with in 2008. Then find out which ones used the Web 'often' (I'll leave that for a later debate) and were visited by a Wholesaler. Select a group of one hundred advisors from this list. Don't select the advisors most desired by Wholesalers. Don't select advisors that are prime candidates for your revolutionary focus firm strategy. But do select a hundred advisors and, in 2009, don't visit them.

That's right. Don't send a Wholesaler to visit them. Continue building great online tools and providing commentary. Please send them valuable, timely e-mails (oh, and very few of them, if you will). In July, review the production for those hundred advisors. If the production was significantly lower than the other population, premium coffee is on me. If not, I'm expecting you to pick up that cup.

I'm already looking forward to that Iced Yirgacheffe.

What the Jets Can Teach You About Staffing

by Lee

I became a fan of the New York Jets when I moved to NYC in 1996 (the year the Jets went 1-15) and after 12 years, they've taught me an important lesson about hiring/staffing. Being a Jets fan, I've learned a lot over the years: how to temper my expectations (their only Super Bowl was following the 1968 season), what it feels like to have someone you trust stab you in the back (see Belichick, Bill), and what it feels like to have the competition cheat to get ahead (again, see Belichick, Bill).

But there is hope in Jet-land and a lesson that can apply to every organization. During this past off-season, the Jets spent $140 million to sign Alan Faneca, Calvin Pace, Damien Woody, Tony Richardson, and others. Then, the Jets made the boldest personnel move in franchise history, acquiring the legendary Brett Favre from the Green Bay Packers to replace signal caller Chad Pennington. Whether these moves will ultimately pay off with the team's first Super Bowl in 40 years is still to be seen (Sunday was a good start against Miami), but the Jets management made smart moves that few other organizations have proven willing to make: replacing a number of solid, run-of-the-mill performers with All-Star caliber talent.

Many teams within asset management firms are filled with well-intentioned, but unspectacular people (think Chad Pennington) that are capable of leading the organization to middle-of-the-pack performance.

Is that good enough for your firm? If you are looking to grow faster than the competition, win the biggest institutional mandates, or get the best shelf space, you need to find the All-Star players. Whether you develop these All-Stars in house, or bring them in from another team, it is no longer enough to have nice people that try their hardest. For most firms, the time is now to upgrade your roster if you want to be around in the "postseason." While history has typically proven otherwise, I expect the Jets to be there with you -- go J-E-T-S, Jets, Jets, Jets!

The No-Traveling Salesman

by Mike McLaughlin

"Within five years, technology will obliterate the need for business travel." - an entry in The Big Idea series from Fast Company

The assertion is easy to dismiss, and would probably draw laughs in many of the traditional intermediary sales organizations in our industry.

But as I dined on my knees folded into an "economy-minus" seat for six hours on a recent cross-country flight, I began to think the idea has some teeth. Consider:

• Travel continues to be less appealing. Elevated oil prices have triggered rising airfares, not to mention ancillary costs, and a decline in driving across the country. Time spent in traffic has nearly tripled over the last two decades. And decent legroom in coach doesn't come free.
• Technology continues to improve. A wise former employer of mine is just one company using cutting-edge videoconferencing technologies to save millions and improve the quality of remote interactions.
• Companies increasingly think green. Nationwide cut its carbon footprint by 80% over five years in part due to reduced travel, and Calamos has constructed a certified green headquarters.

Less travel. Enhanced technology. Positive environmental impact.

The proliferation of hybrid wholesaling is just one way that these trends are manifesting themselves when it comes to selling to financial advisors. Maybe it's just the start.

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...

Gross Sales Compensation Is Looking Gross This Year

by Mike Ma

In the last few weeks, I have been working with a number of firms who have had to make adjustments to their compensation plans. Some have had to pay people a bit more than their gross sales merit, and some significantly less.

The national sales managers are sharing some of their frustration with gross compensation.

We understand, we've been saying that for years, but I understand the allure of a gross model -- we want people to have clear motivation and purpose.

The dilemma is that we most are trying to keep wholesaler compensation in acceptable band (say, $250K-$500K) of compensation. I understand this as there are financial, but more importantly cultural implications by defying this band too often and by too much.

I think the way out of this dilemma is paying more 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 advantage. Firms should invest more heavily in their ability to get the products on the shelf, and use wholesaling to get more than their products' performance fair share. Hence, distribution has to be their competitive advantage.

Does Your Front Line Have Star Power?

by Anu

On Friday, my wife and I went to the live taping of "A Prairie Home Companion." This is our sixth year going to the show, and, while it's a staple on Saturday nights in our home, I'm in awe of Garrison Keillor after each live performance.

During the entire two-hour show, I think he looked into the crowd twice -- he made eye contact with his customers twice. People sat on the edge of their seats waiting for his next story, but he never looked at us.

Wholesalers and Key Account Managers are taught to do all the right things, including significant eye contact with clients. They attend Dale Carnegie classes and read Salesopedia.

Is it time to consider different, complementary approaches? Asset managers should consider the following training techniques for the Sales -- the front line of the firm:

• Improvisation


• Acting Classes


• Facilitation training

In the front line battle for advisors' mindshare, firms need to prepare wholesalers to be creative, engaging, and spontaneous. Who knows? The sales team may even enjoy training.

Break Out the Box Cutter

by Mike Trapanese

In my life outside of distribution consulting, I play the saxophone. John Coltrane has been an inspiration for me. Generations of jazz musicians have tried to emulate his style of improv by applying music theory to his solos. As it always does in music, however, the theory eventually became a thing unto itself. I'll never forget watching a music teacher throw his finger onto the page of a transcribed Coltrane solo to point out a "wrong note." Since I've constantly got sax on my mind, I've come to realize that lumping mutual funds into style boxes is much like evaluating Coltrane based on music theory.

Morningstar style boxes have their merits. As a classification system, they are an effective way of grouping funds for reference. As a marketing tool, they present an intuitive way to describe funds to advisors. They are, however, an inductive overlay and can be limiting from a product development standpoint.

Research analysts at broker-dealers are a more savvy audience than their advisor colleagues. Increasingly, the responsibility of picking funds is being transferred to these analysts as more and more assets pass through discretionary platforms every year.

These gatekeepers are more discriminating in their selection processes. In contrast to many advisors, they understand pure alpha and actively seek it. To differentiate their products in the eyes of analysts, product developers should look to build products around successful strategies rather than style boxes.

Morningstar gives style drift a bad rap because it undermines the integrity of their peer groups. Quite often, however, "drift" drives returns as part of a manager's investment strategy. This "drift" is the wrong note in a Coltrane solo. Thus the problem is not style drift-- but it could be the style box itself. The omnipresence of these boxes has blurred the line between strategy and style box. Building products around style boxes is a reliable way to ensure beta, but at the same time it is a sure-fire way to undermine the benefits of a successful strategy.

Building a fund product from the strategy up, without consideration of the style box it will occupy, comes with consequences. Invariably, returns will deviate from their benchmark. To communicate this paradigm shift to research analysts, Athena has developed a classification platform that groups funds by common strategy elements rather than common holdings. Examples of these strategy buckets are Economic Position, Future Growth, and Profitability. We at kasina have already started to hear research analysts talking about Athena's SBI platform.

It's important to remember that style boxes are a limiting force, and trying to stick within their walls is bound to limit alpha and drag returns towards the benchmark. Similarly, John Coltrane didn't rip legendary solos by staying within the confines of music theory -- he first understood the theory, and then understood those instances in which he had to surpass it.

Distribution Gone Wrong

by Anu

Last Friday morning, I stayed home waiting for the Maytag repairman. A courteous, well-spoken repairman arrived two minutes after the provided "time window" expired. Nonetheless, the idea of having ice excited me sufficiently not to comment.

He took the door off the freezer. He noticed that water was not coming into the freezer. He pulled the entire refrigerator out and looked at the back. A-ha! Part 10a -- the freezer compressor valve was faulty.

Hooray! I thought. Then, he went to his laptop and proceeded to order the pieces (through a pretty cool Web 2.0 application). "Uh, don't you have part 10, uh, a?"

He replied, "No. I only have a toolbox."

Oh no, I thought. So now what? He explained that the parts will come to my house in one to three weeks. After they arrive, I need to schedule another appointment through the 800 number, and then spend another half day at home.

This is a distribution model only an operations management geek could love. It's easy for the parts manufacturer. It's easy for logistics to just ship me 10a. It's even easy to ensure that a qualified repairman can come and replace 10a. Did this delight me, the customer? NO!

Who cares? We should all care. We need to maniacally focus on distribution models that are customer-focused. Asset managers need to ensure that distribution is investor-friendly and not simply an easy process.

For example, the SEC push to XBRL exemplifies the difference between customer-friendly distribution and easy processes. The data provided through XBRL is not new or differentiated from the required data each licensed public mutual fund must have. But because each firm has matched its needs to follow an easy process, they publish this data in different parts of dense prospectuses; the SEC has become involved.

Thanks to Chairman Cox's initiative, investors will soon be able to compare products easily. Perhaps they will even be delighted.