blog

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, Sale