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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.

Crisis = An Opportunity Not to be Missed

by Eric Daugherty

There is a silver lining around the turmoil in the financial markets over the last nine months: people are paying attention and taking things seriously. Yet some asset managers are not capitalizing on this unprecedented opportunity to be pioneers.

In 1999, I attended a contingency planning conference where the organizers polled attendees. Question: What needs to happen for contingency planning to be taken more seriously in your organization? The #1 answer: A real disaster.

Contingency budgets ballooned after the tragedy of 9/11, and there was a laser-like focus on contingency planning. The parallel to the current financial markets meltdown is clear. Investor engagement in financial affairs is at a peak not seen since the Great Depression. A Money Management Executive article from July states that more retirees are worried about their finances and that 61% are working with a financial adviser (up from 56% in 2008).

"Turbulence is life force. It is opportunity. Let's love turbulence and use it for change."
-Ramsey Clark

There is a huge opportunity for asset managers to seize the day. Some firms seem to realize this; others do not. Over the last three months, we have spoken with senior managers and executives at most of the asset management firms. Their reactions to the markets crisis fall into three clear categories:

• Denial - the thought process here is, "This too shall pass. If we just duck and cover, conduct business as usual, and let time lapse, we will wake up in 2010 and the world will be right again."
• Defensive - "This is too serious to ignore. Clients and regulators expect us to be doing something. So, let's do what we can to avoid being labeled as the bad guy, and make some cursory changes in communication, product lineups, and management to show that we are part of the solution."
• Opportunistic - "The world has changed. There is an opportunity for innovative solutions and products and there is a dearth of communication and trust. We will fill that gap. Now is the time to be bold. We are here to help our clients and to lead them to greater financial security by being a trusted partner."

Note that these attitudes exist not just for companies, but for divisions, departments, and individuals. This is important because any person or entity can drive a discussion around which of these paths to take. For example, we spoke to one sales manager who said (paraphrased), "My team cannot afford to deny that the world has changed, and we cannot wait around for our clients, our competitors, or our firm to impose change on us. We must redefine what role we play, how we play it, and how it adds value to our firm in the new reality. My job as a progressive leader is to drive that redefinition."

Now more than ever, people are looking for straight talk, simplicity, products that meet their unique needs, and advice. There will be winners that emerge from this crisis. The winners in our industry will be the ones who take the opportunistic approach to confronting the crisis and meeting it head-on.

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.

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.

Distributors are Squeezing Asset Managers in Revenue Share Negotiations

by Steven

Asset managers need distributor-specific P&Ls to be able to make strategic bets in negotiating new revenue sharing agreements.

Banks have been hit hard by the economic crisis. Therefore, they are out to maximize their own profits, whatever it takes. For example, the merged Morgan Stanley and Smith Barney entity is seeking a pretax profit margin in excess of 26%, up from the current mark of 18.8%. How can they achieve this radical increase in profits?

Between the discussions at our recent National Accounts Roundtable and the research for our report, Evolving Distribution Amid Bad Markets, we found that many distributors are looking to create more advantageous revenue sharing agreements that will squeeze asset managers even more.

In the past, asset managers saw themselves as partners to the distributors. However, its clear that in times of turmoil the pain gets passed upstream in the value chain. What previously looked like "partnerships" gravitate back to supplier/buyer relationships.

So, how are asset managers supposed to respond to these negotiations? Firms need to recognize there are three pillars to the asset manager / distributor relationship: product, service, and the financial arrangement. In order to negotiate better terms for one pillar, firms need to ensure that they are bringing value to the discussions about the other pillars:

1. Product - is only a lever if the product offered is something unique in the marketplace or if the performance is significantly better than other products in its category. An example of this is PIMCO's Total Return Fund, which is the darling of the industry today.

2. Service - will not get you on the shelf, but it might enable you to negotiate a better revenue sharing agreement. Most of the distributors are looking to outsource their advisor training and development to the asset managers. But we caution firms on using this lever. Most of our research has shown that value-added services do not translate into long term asset flows unless the value-added program specifically fits with the asset manager's brand.

3. Financial - revenue sharing is seen as a toll to get on the shelf. The revenue share does not provide you any additional flows or additional considerations in the analysts' recommendation. For some firms, this might be the only lever they can use to get into the discussion, but remember that a revenue share alone will not get you shelf space or assets.

In order to defend their own profitability from being squeezed, asset management firms have to utilize one of the first two pillars in their negotiations. But to be honest, this will be very difficult for most firms, because most do not have a product that is unique or that has great relative performance, and most firms cannot provide substantial marketing and sales support.

Firms should begin calculating profitability using two main areas of their business in order to understand how to prioritize relationships and determine where to commit dollars:

• Channel - prioritization will help firms decide where to invest in both marketing and wholesaling resources. Firms need to consider if, in light of new revenue sharing agreements, the bank/wire channel is still the most profitable channel, or if the independent and/or RIA channels will be more profitable.
• Distributor - P&L assessments enable firms to make strategic decisions about placing one product with a specific distributor or not. A financial analysis of profitability may lead a firm, for example, to pull its mid-cap value product from Merrill Lynch and decide to place it only with UBS.

Only if a firm understands the economics of its various relationships can it make the right strategic decisions.

In these tough times, distributors cannot afford to care about the asset manager's profitability. They have their own profitability to worry about. Unless asset managers have distinctive leverage via product or service, they will not be able to withstand the squeezing that profit-conscious distributors will put on them. As we identified in our recent study, asset managers have already reduced cost structures by about 12%. Even so, we estimate that net profit margins industry-wide have fallen from 20% to 8% over the past year. To prop up profits in a low asset environment, asset managers must rely on distinctive product/service combinations that will allow them to capture a fair portion of margins from distributors.

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.

Ticking Time Bomb: Fund Consolidation within Platforms is Eminent at Merging Bank/Wires

By Steven

There is a ticking time bomb that asset managers need to address head on: the consolidation within the platforms due to the overlap as the result of the merging distributors. Our current research with the major distributors' gatekeepers shows that this is going to be significant.

There is no short term danger of this time bomb exploding. All products will be put on the combined shelves at the merged entities. However, over the next 8-12 months all of the merging distributors will evaluate their model portfolios as well as their recommended, approved, and focus lists (the models and lists collectively are up to 90% of assets). Then they will decide which funds they will keep and which funds will be eliminated. The result will be significant and a number of fund companies will see their assets shrink.

Luckily, asset managers have some time to make their case for why they should not be eliminated. Of course, the major driver for whose funds will stay is going to be based on relative performance. But, if all things are equal (or even close), the analysts are going to make a qualitative decision.

National Accounts groups need to have an action plan for every fund that might be in question. Here are a few things that should be considered:

• Evaluate the competitive position of your funds in model portfolios and on recommended, focus, and approved lists
• Select those well-performing products that have tough competing products and develop your competitive positioning
• Be proactive in reaching out to the distributors’ distribution and analyst teams
• Ensure that you provide distributors with access to your portfolio management team to best position your funds

The time is ticking, but there is plenty of time to for National Accounts teams to defuse the fund consolidation time bomb.

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.

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.

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.

Despite Pressures, National Accounts Needs Love

by Lee

Over the past several weeks, we have been conducting a series of surveys to see how Sales and National Accounts executives are responding to the ongoing financial crisis and the resulting mergers among distributors. As we are seeing an increased role of the research analyst function at the wirehouses and other major distributors, I was especially interested in how National Accounts teams are changing.

I was pleased to see that 80% of asset management companies and variable annuity providers are considering making changes to their National Accounts team for 2009. Compensation and team structures certainly have room to improve. At the same time, however, I was disappointed to hear that 60% of firms expect each National Account Manager to support more distributors next year than they do today, driven largely by anticipated layoffs. The majority of National Account Managers today are overwhelmed and unable to think strategically about their relationships. With the average team having only seven managers, each of whom currently supports six distribution partners, it is important for firms to either expand their team, decrease the number of distributors supported, or both. I have found that the firms whose National Account Managers are able to focus on three or fewer relationships have found far greater distribution success.

Other findings of note from our National Accounts survey include:

• 30% of respondents plan to add National Account Managers in the near future while another 30% plan to decrease the number of National Account Managers
• Despite the anticipation of a weak economy, 40% of firms expect their National Account Managers to make as much in 2009 as they did this year, or more
• 30% are considering detaching National Account Manager compensation from distributor-specific sales
• 20% are considering detaching National Account Manager compensation from overall firm sales (and 20% have already done so)

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.

I Am Mad At Me

by Anu

For some ridiculous reason, I've started watching the talking heads on cable television. Why? I can't really say. Somehow, I want the news of the day distorted and contorted. Anyhow, why do any of us make these choices?

Simple, we're emotional and spontaneous. Yet, firm after firm seems to desire rote, tabular methods to market and sell financial advisors on the merits of their products. Firms will always get this wrong if they don't appeal to the emotions of the financial advisor in some way. Does the advisor worry about large-scale losses in client accounts? Does the advisor want to be seen as a hero to her clients? Do you know? Do you assess? Last week, Steven mentioned our proprietary research showing advisors are not panicking to move assets away from mutual funds. But are they shifting to funds with an emotional appeal to safety in times of duress? What decisions are advisors making?

Think about yourself and the decisions you make. Advisors have emotions and act on them. Look for kasina to bring more cutting-edge research in 2009 that connects emotions and decision-making.

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.

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.

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!

All Around the World, Same Price

by Lee

Last month, Steven wrote about the emerging trend among global distributors of consolidating their global research functions. Since that time, I've had conversations with four large asset management firms that they have begun to consolidate their global National Accounts function in response. These initiatives are typically focused on a small number of large distribution partners, often some combination of Citigroup, Goldman Sachs, HSBC, JPMorgan, and Merrill Lynch.

As firms look to centralize their distribution discussions, a number of questions arise, such as where to find qualified individuals to manage global distribution relationships. Perhaps most importantly, firms are faced with questions about pricing. For example, should sub-advisory fees in different countries be based on the same schedule or vary from region to region?

While many firms fear that distributors will try to squeeze them on pricing in exchange for shelf space around the world, the opposite effect may start to come into play. With increasing competition for limited product capacity (from global distributors as well as from sovereign wealth funds), product manufacturers may be able to command a premium in exchange for capacity in truly alpha-generating strategies. Pricing decisions will need to be made on a case-by-case basis, but firms must recognize that these choices are becoming ever more complex in a global environment.

Morningstar Takeaways

by Tricia

Back from the Morningstar conference in Chicago: The consensus from veterans of the Asian market is that Asian markets have re-priced themselves correctly following five years of unsustainable growth. Japan is interesting for the first time in a long time. Experienced managers continue to buy firms with long-term production capability, not short-term value, and advise others to hedge against Asian currency inflation. The main threat to global growth? Unredressed inflation. In other words, too much money chasing too few goods.

An interesting tactical note: In a room of about 150 financial advisors, about 2/3 held ETFs. Of those, one half said ETFs were a key part of their strategy. My question is, how can ETFs be so cutting-edge and innovative if so many people are already using them?

Overall, what I got out of the conference was this: The biggest challenge to globalizing your strategy is rarely operational; instead, the challenge usually lies in persuading people to see themselves as competitors in an increasingly complex global economy, and not to rest on their laurels -- a profound, and profoundly humbling, paradigm shift.

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.

Redemptions a Problem? Internals, the Cure

by Mike Ma

"We are beating benchmark by 1300 bps and we are suffering net outflows!"
"How do we stem redemptions from products that have good performance?"

This first statement was said by a good friend of mine I am vacationing with who happens to be a portfolio analyst of a high-profile asset management firm. The second question was also brought up in a call today with the head of marketing from one of the top 10 asset managers in the industry (I am on a working vacation ... lovely!) -- Two similar questions in 12 hours, so I figured a post was in order. My answer to both --

The internals.

Get the internals out there more, but do it with more intelligence. Two quick tips and thoughts, in order of preference and effectiveness:

1. If you own their own transfer agent ... - One of our clients has used the internal desk to call an advisor when a redemption order came through. You have T+3 before settlement and I'd bet you will be surprised at how many advisors you can talk off the ledge.
2. Or else ... use the Web reports - If you know which products are on your watch list make sure traffic reports or downloads of information about those products are promptly and delicately followed up on with by your internal desk on a daily basis. I'd like to reiterate the word *delicately.* You don't want your internals to come off as big brotheresque; rather, have these advisors be put into a regular call pattern with regular leading questions.

This is a situation best handled by people who can readily get to wherever they are needed. Who better than the internal wholesaler?

We just have to give them better tools.

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.

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.

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.

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.

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.)

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.

The Loyalty Game: Who Really Matters

by Mike McLaughlin

It would have been interesting to see where Vegas set the over/under.

A recent study of 4,000 mutual fund investors found that more than two-thirds of asset managers have negative loyalty scores. That is, most asset managers have more detractors than supporters.

The gory details, while car-crash interesting, are not necessarily all that surprising. To illustrate: Vanguard topped the loyalty rankings; Putnam finished dead last.

Certainly this is a critical issue for the industry to address. Firms need shareholders who believe in them. More importantly, though, firms need distribution partners who believe in them.

In the discussion of the study, the article references a similar survey of 23 investment distributors in which every single one finished with a positive loyalty score. Investors may not be attached to the asset manager, but they are certainly close to the intermediary selling the manager's products. To draw an analogy, people trust their doctors, but distrust the pharmaceutical companies supplying the medicine.

With distributors continuing to have more and more influence over asset managers' success, firms have to push the envelope when it comes to both selecting and engaging them. The customer loyalty enjoyed by distributors requires greater relationship-building effort from firms. Recently we have seen:

• Increased resources pointed toward the development of value-added offerings to better service partners' advisors
• Restructured Sales and National Accounts teams geared toward meeting the needs of broker/dealer research analysts to strengthen relationships at the home office level
• Re-engineered Web sites designed to not only engage advisors but the home office as well

Activities in this vein figure to only grow. Strategies that leverage the firms own strengths must be coupled with those that utilize the cultivated loyalty and power of their distribution partners. In fact, it seems that the latter may be more important than firms have recognized.

Aligning Distribution: The $500 Million Challenge

by Lee

The typical asset management firm leaves over $500 million in sales on the table every year due to poor client segmentation and targeting, mishandled lead management, ineffective marketing support, and sub-optimal branding.

While firms may acknowledge problems in one or more of these areas, few recognize the cause - a lack of alignment between Distribution functions: Sales, Marketing, and National Accounts.

To capture the over $500 million in potential assets lost due to misaligned Sales, Marketing, and National Accounts groups, firms need to evolve toward a new distribution scheme. Rather than assuming that the issues compromised by distribution alignment will resolve themselves, senior management must ensure that they set the table for success by taking the steps below, outlined in more detail in our recent "Aligning Distribution: The $500 Million Challenge" study:

Creating Cross-Functional Distribution Strategies:

Hardwiring Alignment:

Co-branding With Distribution Partners: An Entree to Consultative Selling

by Johanna

Legg Mason recently announced that it is going to work with its focus distribution partners to co-brand and tailor value-added materials through a program called The Advisor Partnership Program (TAPP). The goal of the initiative is to elevate the status of Legg Mason products through a consultative selling model.

Consultative selling is a strategy that many firms claim to pursue; however, most haven't actually devoted the time and resources to reach true consultant status. Legg Mason's plan to start with focus firms in developing these programs switches up the traditional strategy of first looking internally to determine the message to communicate to advisors. Pledging to learn about individual distribution partners, and, most importantly, incorporating that knowledge into personalized programs, increases the likelihood of making a real impact... because let's be honest, value-added programs don't have the strongest track record of demonstrative ROI.

However, before following in Legg Mason's footsteps, firms should consider the implications of their latest initiatives:

• Developing tailored programs isn't cheap, so limiting the number of focus firms ensures firms won't bite off more than they can chew.
• National Accounts involvement is critical to leveraging distribution partner relationships and identifying appropriate content and topics for programs.
• Asset management firms must maintain a flexible development and delivery of value-added programs to effectively develop and sustain programs.

While what Legg Mason is proposing may seem daunting, it is certainly a step in the right direction to achieving a true consultative selling approach for focus-firm advisors. For more information on effective creation and leverage of value-added programs, keep an eye out for the upcoming kasina whitepaper Removing the Blindfold: Leveraging Value-Added Programs.

Helping B/Ds Research Analysts Cut through the Clutter

By Sean

Given the number of investments products available, research analysts are receptive to anything that facilitates their search processes.

One resource that has proven itself to be effective in helping research analysts screen investment products is the Web. For example, research analysts commonly use MorningStar to access basic performance, holdings, and portfolio characteristics. Where Morningstar falls short, however, is in its delivery of institutional-level investment product data and analysis. Research analysts typically use publicly available data to conduct attribution analyses for different time periods. An opportunity exists for firms to add value to research analysts by delivering such analyses online.

Van Kampen, MFS, and Putnam Investments currently offer dedicated Web sites for broker/dealers' research analysts. Each offering features in-depth product data and analysis, portfolio manager research and commentary, as well as firm contacts responsible for servicing research analysts. Initial feedback on these Web sites from the research analyst community has been positive. As one research analyst put it, "while we conduct our own attribution analyses, it's interesting to compare ours against each firm's own analysis."

While there's no way to draw a direct correlation between building a dedicated research analyst Web site and increases in shelf space, a number of broker/dealers are starting to inquire about the availability of them. As the word spreads and research analysts continue to get value out of Van Kampen's, MFS', and Putnam's offerings, asset management firms should consider how they intend to demonstrate a similar level of committment to servicing the needs of broker/dealers' research analysts. kasina will be exploring this issue in much greater detail in a forthcoming whitepaper: "The Shortest Distance Between Two Points: Using e-Business to Support Distribution Partners."

Merrill Lynch: "Consults 3.0" Will Shake Things Up

By Sean

Large distributors are exerting ever greater influence over fund flows. Asset managers without access to these platforms are at a significant disadvantage. These are often the smaller players that are less able to offer favorable revenue sharing agreements or support the ongoing sales and marketing needs of large distributors like Merrill Lynch, UBS, or Wachovia.

All this may change. Though no public announcement has been made, Merrill Lynch is rumored to have plans to create a new distribution platform, commonly referred to as Consults 3.0. Under Consults 3.0, Merrill would assume control for all of the buy/sell orders of the funds on its platform, meaning that firms would have to pass along this information in advance.

Instead of the 40 - 50 basis points paid to firms on Consults, Consults 3.0 participants would reportedly receive 20 - 25 basis points to account for Merrill's assumption of clearing responsibilities. However, given Merrill's scale, these costs would be relatively low. So what does this mean for asset management firms?

Here's our initial perspective on the winners and losers in a Consults 3.0 world:

Winners: Smaller firms willing to hand over the buy/sell decisions in order to gain access to the distribution opportunities promised by the platform.

Losers: Larger firms unwilling to see their fees cut in half or hand over information pertaining to the strategies of their funds.

Other potential implications include:

Marketing & Sales: Because the fund companies managing the underlying portfolios within Consults 3.0 will most likely not be transparent to advisors, branch-level wholesaling and other types of marketing support will no longer be as important as they have been in the current environment.

National Accounts: However, National Accounts will still play an important role in positioning products to achieve shelf space. However, sales approaches will need to become increasingly analytical in nature as distributors' research teams increasingly become the primary decision-makers.

The most significant roadblock is:

Competitive Intelligence: Although Merrill Lynch divested itself of its asset management capabilities, many firms will still draw concerns from having to hand over their buy/sell decisions.

Though no formal plans or timetable has been set, it's becoming clear that large distributors are looking for ways to leverage their scale to increase profits. This could have a dramatic impact on fund distribution. And while Merrill Lynch is the first name to be associated with such plans, consider that others will likely follow if Consults 3.0 is a success. SmithBarney's parent, Citigroup, recently divested itself of asset management, just as was done by Merrill Lynch. Fund companies should monitor this trend and consider the implications for their longer-term distribution strategies.

"Quarterback" of the Relationship

By Sean

As a Patriots fan, Tom Brady's performance over last two weeks has been disappointing. One of his main strengths has always been his ability to read defenses and, based on what he sees, put his teammates in the best possible position to succeed. More than anything else, this is the role of a quarterback; to help his teammates succeed in light of what the defense is doing and an understanding of each player's unique talents.

As home office relationships become increasingly crucial to distribution success, National Accounts Managers must play the role of "quarterback" in order to help their counterparts in Sales, Marketing, and Product Development succeed. National Accounts Managers are the primary link - the first point of contact - between distributors and asset managers. This demands that they gather as much as information as possible from distributors ("read the defense") and disseminate it across the rest of the distribution organization:

- Sales: Ensure wholesalers are aware of where the home office sees opportunities for greater support of advisors in understanding and selling particular products. As Lee pointed out, Sales management should balance this input against what it is hearing from the branch offices.

- Marketing: Similarly, help Marketing understand how the home office would like to see certain products positioned with respect to the distributors' brand and overarching business objectives. National Accounts can also help Marketing identify opportunities to co-brand materials.

- Product Development: By working with Gatekeepers to understand future shelf-space openings and potential areas of focus 3 - 5 years down the road, National Accounts Managers can inform Product Development's planning and longer-term efforts. Here, a long-term focus is key.

By acting as the quarterback for the relationship, National Accounts can play a key role in helping Sales, Marketing, and Product Development succeed by providing them with the better information about distributors' unique challenges, preferences, and overarching business objectives. As much as I'd like to say National Accounts Managers should follow the example of Tom Brady, Peyton Manning is probably the better role model right now.

Never Judge a Partner by its Home Office

By Lee

One of the many interesting discussions at our recent National Accounts Roundtable was about the discrepancy between what a home office contact at a broker/dealer says and what is really going on in the field. While a gatekeeper may tell you, for example, that their firm is focusing on four issues in the coming quarter, it is likely that any given branch or district only latches onto one or two of the four.

This gap between what the home office says and what is really happening has several implications for asset management firms, which should:

Ensure coordination between National Accounts, Sales management, and wholesalers. As National Account Managers typically call on home office contacts only and wholesalers and divisional/regional managers meet with branch/district contacts, there is often a lack of communication to develop a complete and accurate picture. This holistic view of each distributor is necessary to enable distribution success across Sales, National Accounts, and Marketing.

Act as the broker/dealer's "eyes and ears" into the field. National Account Managers should gather feedback from Sales about what is happening at the branch or district level and share that with their counterparts.

Hire people with experience in (or at least knowledge of) the field. Not only do gatekeepers appreciate working with National Account Managers that have field experience, but knowledge of "the way things really work" is helpful in allowing Account Managers to take each message with the appropriate grain of salt.

Getting the Most Out of Rule 22c-2

by Lee

With the October 16th deadline for compliance with SEC Rule 22c-2 rapidly approaching, many asset management firms' operations groups are scrambling. The opportunity brought about by 22c-2 to gain insight into omnibus accounts, however, should be attracting the attention of Marketing, National Accounts, and Sales teams as well.

While an extension of the 10/16 deadline is likely, ultimately having access to shareholder identity and trading data upon request will have implications across a firms' business, potentially including the ability to better...

...tie sales to wholesaler activity leading to more effective compensation schemes

...understand pentration within a distribution partner (% of advisors doing business with the firm)

...identify the firm's "best" advisors

...produce personalized marketing materials

If your firm still views 22c-2 as purely an Ops or Compliance issue, now is the time to change the mindset.

A New Type of Wholesaler?

by Lee

Whether you know it or not, your firm's wholesaling strategy may be hurting the efforts of your National Accounts group.

When meeting with distribution partners, National Accounts teams often set an expectation for the amount of wholesaler coverage in the distributor's branches. Today, these expectations are often not being met because wholesalers have virtually complete freedom to go where they want. Luckily, most distributors are not attempting to track this or are unable to do so effectively. Times are changing, however, as we heard consistently during research for our "Breaking the Bottleneck: Achieving Distribution Success by Supporting Gatekeepers' Needs" whitepaper. Distributors are increasingly evaluating coverage and benchmarking asset management firms' wholesaling efforts against their peers.

Because of this change, firms must ensure that their wholesalers go where National Accounts has promised that they will. Many wholesalers, however, will say that they shouldn't visit certain offices because there is not a good opportunity there. While this may be a cover for other issues (bad location, difficult branch manager, etc.), it is often true that some branches within a network are not worth visiting. Firms nonetheless must ensure that the coverage that is promised to the home office is delivered in the field. Whether this objective becomes part of a firm's compensation plan or not is a firm-specific decision, but this must be a factor that is accounted for somehow in every firm's wholesaling strategy and something that is managed against.

As firms explore non-traditional wholesaling models, they want to even consider a new wholesaling role dedicated to covering the less desirable branches at the firm's key distribution partners. Individuals in this lower cost role would not have the same sales expectations as a traditional wholesaler (or possibly any at all), but would rather serve to fulfill promises that were made, and possibly pick up some additional assets along the way.

Number of Fund Firms Likely to Shrink

By Steven Miyao

I had an interesting conversation with a client about the impact of the tightened screens from the major broker dealers.

My take on it is that the institutionalization of asset management distribution will have a major impact on the overall size of the industry. Due to the heightened importance of research teams at the wires, regional and even the independent managed account platforms fewer products will make the cut in the advisor-driven channels.

This does not mean that there is no more space for small startup asset managers. But it means that firms who cannot produce significant long-term alpha will disappear. This should be a positive trend for the industry. There were 7,977 individual mutual finds listed in 2005. That is way too many. The average research team manages approximately 100 asset managers (for more on that topic click here). The institutionalization will weed out bad product and ultimately mediocre firms.

Just Because You Can Build It, Does Not Mean Advisors Can Sell It

By Sean

In the theme song to his semi-autobiographical film, "Get Rich or Die Trying," top-selling rap artist 50 Cent brags, "I can sell anything, I'm a hustler, I know how to grind / Step on grapes, pour them in water, and tell you it's wine." His point is clear: it doesn't matter what you put in his hands, he can sell it...to somebody.

Unfortunately, 50 Cent does not work at Merrill Lynch, Smith Barney, LPL, or any of the other large distributors of mutual fund products. The advisors at these firms, unlike 50 Cent, can't sell everything. So, these firms try to stock the shelves with products that advisors can sell, or at least have a very good chance of selling.

One Mutual Fund Coordinator at a large distributor summed it up perfectly when describing how most asset managers approach product development: "They manufacture what they can manage without thinking about what advisors can sell and fit into the portfolios." The message to product development teams could not be clearer: It's not about having the most innovative products; it's about having the most innovative products that advisors can actually sell.

What most firms fail to realize is that they have a resource to vet product development ideas in the Mutual Fund Coordinators at their distribution partners. Several Mutual Fund Coordinators confirmed as much during kasina's research for its forthcoming whitepaper, "Breaking the Bottleneck: Acheiving Distribution Success by Supporting Gatekeepers' Needs." To succeed, asset managers need to begin using this resource.

Taking the Time to Prioritize

by Lee

Most companies do a poor job prioritizing - largely because they either haven't thought about how to do so effectively or haven't taken the time.

We wrote about various prioritization approaches in a recent Industry Analysis brief, and there are many that can help, but a favorite of mine is the strategy offsite. We have our semi-annual strategy offsite coming up next week at kasina, and these sessions, which we began shortly after starting the firm, provide our team with a chance to step back, review our progress, and re-evaluate our priorities as an organization. They have proven invaluable in keeping everyone on the same page.

Despite the immense value that I have seen in taking the time away from the daily grind to set strategy, I find that that most of our clients do not have mechanisms in place to do so. It is easy for priorities to get muddled when they are tackled on a one-off basis, and I encourage every firm to:

1) Schedule at least an annual, if not a more frequent, session to set the strategy
2) Do these sessions offsite somewhere (depending on the size of the team, you can even use a team member's back yard)
3) For the day (or days) that you are there, be there - no cell phones, BlackBerrys, etc...
4) Plan lots of breaks (these sessions are exhausting)
5) Have fun - it shouldn't be all about setting strategy - it is important for team building as well

Corporate Social Responsibility

By Steven Miyao

More and more shareholders are starting to look at Corporate Social Responsibility (CSR). PR firm Fleishman-Hillard and the National Consumers League recently conducted a survey to identify what the underlying thoughts are from consumers concerning the importance of CSR. They found that:

- Almost half of Americans say that treating and paying employees well is the most important proof of good CSR, more so than environmental stewardship and philanthropy
- 76% agree that to be socially responsible, companies should place employee salary and wage increases above making charitable contributions and that a company's treatment of its employees plays a big role in individual purchasing decisions.
- The average American portrayed by this survey is very values driven. Those responding said that it is extremely or very important to 79% to work for those who have similar values and principles.
- Buy products and services from those who have similar values and principles. (65%)-
- Socialize with those who have similar values and principles. (72%)

These stats show that consumers believe that CSR is important. The study also looked at how Americans think the corporate world is fairing in terms of corporate responsibility:

- Only 21% give U.S. corporations top marks for being socially responsible.
- Only 30% believe that companies are doing a somewhat better or a lot better job of being socially responsible over two or three years ago.

The Internet is the primary place where Americans get information about CSR.

- 47% say they use the Internet to learn about the extent to which a company is or is not being socially responsible.
- 53% believe their online research is one of the most credible means by which to shape their opinions on deciding whether U.S. companies are being socially responsible.

It is surprising to me that most Asset Management companies do not have any information about their CSR activities on their Web sites. Calvert is one of few firms that has information about its foundation as well as their community involvement on their site.

More asset management companies should be proactive about sharing their social responsibility with their shareholders.

How Does (Name of Competitor Here) Do It?

by Lee

Four times in the last 24 hours, a client has asked me some version of the question "How does [competitor's name here] do it? "It" has at times been related to Sales, Product, and Marketing - in each case, the client wanted to know the secret to success. The secret is that "it" is not about tactics - it is about having something unique to say. Clearly articulated differentiation helps all aspects of the business and is a necessary building block to success in all areas.

You should definitely learn from what your successful competitors do, but don't simply copy their execution - start by identifying what is unique about your organization. What makes your firm different has to be different from what makes American Funds different. We talk more about this topic in our sample Distribution Industry Analysis brief.

Do Not Call Me a Gatekeeper

by Lee

From the perspective of their distribution partners, most asset management firms are simply vendors. But a lucky few have managed to become true partners. While this is a complex process, a simple first step may well be rethinking a basic term: "gatekeeper."

People in Key Accounts groups always talk about interacting with gatekeepers at broker/dealer firms. There isn't anyone with the title "Gatekeeper" on their business card - there are Mutual Fund Coordinators, Research Analysts, etc... but no "Gatekeepers." One reason for this is that these people don't see themselves as "gatekeepers" (with its negative connotation of restricting access).

We have seen a major shift within asset management firms that re-label the "Internal Sales Desk" as the "Internal Sales Force." What do you think would happen if the name "Gatekeeper" is rebranded?

Integrating with Distribution Partners

by Lee

At our Spring e-Business Executive Roundtable in Las Vegas, I led a session on the importance of working closely with distribution partners (broker/dealers, banks, etc.). While the idea of "content syndication" (making information available as part of a distributor's intranet) has been around for years, we are starting to see some traction around using e-Business to support distribution partners amongst a few firms (MFS, Van Kampen, etc.) whose e-Business groups work closely with their Key Account teams. These organizations look to syndicate content for rep use and also spend time building online support for the gatekeepers and research analysts at distribution partners. These topics are covered in the brief presentation that opened the Roundtable session, and I encourage every asset manager to explore ways in which they can beef up the level of support they provide to distributors.

Key Accounts Needs to Identify Distributor Needs

by Lee

We recently kicked off research for an upcoming whitepaper of the needs of broker/dealer gatekeepers, a follow-up to our "Beyond Key Accounts" whitepaper from 2005. Today we had a great internal brainstorming session in which we identified three issues to address in the whitepaper. In each of these issues, Key Accounts groups today are often a bottleneck for distribution success.

1) Key Accounts groups can aid firms in developing profitable products by better understanding the needs of their distribution partners. Today, product opportunities are often missed.

2) Key Accounts groups can aid in ensuring optimal shelf space by better supporting the research teams at distributors. Today, research teams are not properly supported by most firms. A few have recognized the need for more sophisticated skills among their Key Accounts team and have hired CFAs or even PhD-level Key Account Managers.

3) Key Accounts groups can aid firms in getting the most out of their Sales & Marketing initiatives by better managing the relationships with their counterparts at distributors. Today, a lack of understanding leads to inadequate support, often meaning that it is near impossible to get a phone call returned or a piece of literature approved.

We look forward to speaking with Key Account Managers, Gatekeepers, Research Analysts, and others as part of our research over the next couple months to identify ways in which firms can "break" the bottleneck.

Measuring Shelf Space

By Steven Miyao

As a follow up to my last post on shelf space, opportunities do not simply just happen. Shelf space allocations are dynamic and reflect changing marketplace needs.

Shelf space value should be calculated using a formula that weighs the size of the shelf space market share opportunity, stickiness of assets, number of competitors, recent product sales, and revenue potential. Shelf space is optimized when a firm has fully leveraged the value inherent in the space to maximize revenue generation, profitability, and the strategic value of the relationship.

But to move up, you must first know where you are. Unfortunately, many firms have no formal process in place for measuring shelf space beyond a listing of the products they make available to the distributor. A more active program would seek at a minimum to capture shelf space data with an eye to anticipating product turnover and new opportunities. By understanding how cost and performance impact a distributor's decision making, the asset manager is positioned to develop and offer new products to meet these changing needs in a timely way.

Interestingly, the value of shelf space within an organization is not always equated with high volume sales. In one instance we examined, a firm focused on selling a short-term bond fund that was gathering substantial assets. The product won a significant amount of shelf space in a national wirehouse channel. However, following an evaluation of the shelf space, the managers realized that the turf they occupied was not very valuable after all. Redemption rates were high and profitability was low. As a result, they changed strategies, moving their shelf space to a more profitable large cap product with better stickiness.

Shelf Space

By Steven Miyao

Historically, firms have been happy to sign selling agreements with distributors and then trumpet their access to an expanded platform. But while the selling agreement gets you in the virtual door, it doesn't help you close a single sale. Maximizing shelf space value is not just an exercise in adding more slots but of securing the most valuable slots across the industry. Asset managers need to recognize that shelf space is not made available in random ways. Distributors have processes that drive additions and deletions of products from shelves that determine when shelf space opportunities will exist.

Like most sales organizations, financial product distributors want to move the inventory. To that end, they promote products on their shelf space that bring them the most profits. These include packaged products like defined contribution, mutual fund wrap, and SMA wrap platforms that are profitable and easy to market. Distributors and advisors like these packaged products because they streamline operations and provide clients with asset allocation and automatic rebalancing.

Every distributor is unique, but understanding the floor plan is critical to product development and marketing efforts. Firms must understand where to best "put" their products to get the best exposure to advisors. For asset managers who want to avoid the bargain basement treatment, the solution is clear: make sure your offerings are aligned with the way products are presented to advisors within the distributor's virtual store.