blog

It Takes a Village

by Lee

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

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

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

Funds Cannot Get Sued Over Sudan

by Steven

The investment situation in Darfur illustrates why it's good business for mutual funds to be more socially conscious.

When I go to the grocery store, I look for three things: quality of produce (taste and health benefits), cost, and the environmental impact of the produce.

Should fund firms let social awareness determine which companies they work with, or should they just focus on getting the maximum return for their investors?

A recent SEC ruling provides a "Safe Harbor" for mutual funds that divest from Sudan. This ruling provides certain legal protections to funds that divest from companies (PetroChina, Sinopec, India's Oil and Natural Gas Corporation Ltd., Petronas, Schlumberger, and Tatneft) doing business with the Sudanese government. Under these legal protections, the fund firms cannot be sued for making investment decisions based on divestment criteria.

Divesting in companies that do business with the Sudanese government is a choice--there are other, alternative, socially responsible funds companies can select instead.

Additionally, it's simply good business to avoid companies that engage in "bad" corporate citizenship. Engaging with the Sudanese government, for example, puts companies at risk. Not only are they risking exposure to negative public opinion, but they are also linking themselves to a highly unstable government.

Consumers are very powerful, and their demand has made organic products a huge category within stores. Similarly, investors, specifically institutional investors, are becoming more socially aware. No doubt, we will see more fund managers adopt some of the social screens that the SRI sector has utilized for years.

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

by Corianna

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

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

One common approach is:

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

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

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

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.

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.

The Global Outlook: What to Watch For

by Tricia

Here in Chicago at the Morningstar Conference, the watchword is complexity. If I had to pick the most important thing to talk over with our clients, it would be the convulsive global environment.

The operating environment is almost completely reversed from what anybody would have dared to say even a year ago. The emerging markets are net creditors, and the US is a net debtor. The $350 billion dollars of market recapitalization came from the Asian central banks, not from the G-7. So did 60% of all global growth. Brazil's sovereign debt rating is higher than that of Citi's. The expectation is that the next massive recapitalization need will be that of the American consumer, whose resilience carried the global economy through the 1997-98 contagion.

That's nerve-racking. Consumer spending is about 70% of the American economy, and the American economy is about 1/3 the global output. In the last twenty years, Americans have had most of their equity stored in the value of their homes. We are right on top of the point where it will make sense for some people to drop off their keys and walk away from their mortgages. Certainly, for the first time in American history, homeowners are falling behind on their mortgage payments before they fall behind on other payments.

As we said in "Future of Distribution," the ongoing erosion to investible assets as well as to margins, makes a more compelling argument for global diversification (as if you needed another one) -- not just geographically, into the BRICs or "developing" (we're going to have to come up with a different nomenclature soon) Asia, but across commodities and industries as well.

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.

Investing in $ocial Networks

by Corianna

Cake Financial and SmartyPig are two social networking sites that have recently caught the attention of the press. The former is something along the lines of a huge online investment club allowing investors to track their portfolios, and the real time performance information of acquaintances and strangers alike. The latter lets individuals set savings goals and distribution plans and share them with friends, family, and loved ones.

On June 19th Cake Financial boasted the listing of over 5,000 new portfolios, and within two months of launching, SmartyPig had users in all 50 states. The success of these two sites suggests the turning of a new page in the story of online interaction. In particular, these sites:

• Excite competition between participants
• Allow people to learn from the experience of others
• Depend on people openly sharing financial information

The first two bullet points suggest that incorporating social networking capabilities into advisor sites might increase sales.

The third bullet point indicates that users are feeling more and more secure interacting and sharing personal information online. As users' comfort levels continue to increase, so will the demand for extensive online capabilities -- ranging from self-servicing tools, to ways to interact with others.

Making the Business Case for the Web

by Andy

One of the common frustrations of e-business leaders is that they are asked to demonstrate return on investment (ROI) on all web expenditures. For many years, e-business practitioners have been forced to rely on a steady stable of axioms to make the case for Web expenditures, such as that it supports brand, or that it is a must in this day and age. And while those of us who are close to the Web appreciated the truth to these assertions, what e-business needed was a focus on the business and elimination of the implicit pejorative the 'e-' implied.

Over the past several years a strong business case for the web has emerged:

• Advisors are demanding to interact and be serviced via the web.
• The competition at the top of this industry is forcing our firm to constantly raise the bar in how we evaluate the industry.
• Web use is positively correlated to gross sales.

The business case cannot be ignored. Customers want to interact with firms online, the competition is raising the bar, and sales can be positively correlated with Web use. The Web is no longer a perfunctory obligation, but a significant means of doing business, and, accordingly, a necessity of business itself.

The Growing Exchange Traded Product Buffet

by Johanna

Advisors are excited about ETFs. In a recent survey of over 800 advisors conducted by State Street Global Advisors and The Wharton School of Business, 67% of polled advisors said that the ETF is the "most innovative investment product in the past two decades."

Product providers are equally excited, and recognize the opportunity exchange traded products offer, demonstrated by the 300-400 ETF products awaiting approval with the SEC, and the prediction that 560 ETFs are going to be launched in 2008. Twenty-three products were launched last month alone.

With the mad dash to get a piece of the exchange traded product market, providers are in danger of overdoing it. In the survey, 21% of advisors listed "overwhelming choices" as the greatest disadvantage of ETFs. What does this mean for product providers?

Educational Support

Firms must support the growing market with value added content around the advantages of products like ETFs and ETNs, but also around the underlying indices and the various ways these products fit into an investor's portfolio. Clearly the Web comes to mind as a key lynchpin to supporting advisors and helping them choose between the myriad products on the market today and those soon to come. For example, advanced product selection tools and educational tutorials around less understood products (such as ETNs) will be increasingly critical in the upcoming months.

Differentiate

Furthermore, few firms do a great job of differentiating their exchange traded product offerings. ETF providers have differing philosophies on how to structure their ETF offerings. For example, WisdomTree uses core earnings or cash dividends to choose and weight companies in their ETF products, and Vanguard's ETFs are an additional share class of its existing mutual funds. Do advisors understand what this means when it comes to choosing products? Firms that are able to educate advisors around product fundamentals, but then also differentiate in this rapidly expanding space, are more likely to come out on top.

All Around the World With One Research Team

by Steven

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

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

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

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


• Global Coordination -- Ensuring coordination with local research teams

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

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

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


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


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

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

Starting Over with Wholesaler Compensation

by Mike Mc

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

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

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

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

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

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

eBusiness, Baby-boomers, and the Fountain of Youth

by Corianna

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

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

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

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

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

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

by Mike Ma

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

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

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

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

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

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

Anyone have suggestions?

by Lindsay

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

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

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

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

Now's the Time to Go Global

by Steven

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

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

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

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

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

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

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

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

It Will Never Be Morning Again In America

by Will

We lost a giant last month. Hal Riney, ad man extraordinaire, died on March 24. In the age of DVRs allowing us to fast forward over commercial breaks, it's hard to remember the impact a television ad can have on a culture. Riney made ads good enough to stop fast forwarding.

Most great advertisers get one, maybe two, legendary spots in their career. Hal Riney had three legendary campaigns. That may not sound like much, but imagine a baseball player hitting three times more homeruns in his career than anybody else. He was that good.

Riney made campaigns that stood out and presented brands with a compelling message, no matter what he was pitching. He played to your brain, making memorable statements, while playing to your emotions without turning saccharine. The Bartles and Jaymes commercials gave the world two deadpan wine cooler salesman who were so engaging they actually made you want to go have a wine cooler. The ads were memorable, funny, and begging to be imitated. In the late 80's, you could deliver the line "thank you for your support" and get a response of riotous laughter.

His branding initiative for Saturn gave us an American car that established a personal connection. Thanks to Riney, Saturn was the only car company that made you feel like you were part of one big happy family -- that's one heck of a differentiator in a marketplace with pretty homogeneous products.

Arguably his most influential campaign gave us the sentence that reelected Ronald Reagan: It's morning again in America. Say what you want about Ronald Reagan, the man knew how to advertise: deliver an intelligent, well-spoken message that lifts you up and makes you feel good about the decision he wants you to make. That's no small feat -- and it's a far cry from what we see in campaign messaging lately.

Thanks, Hal, for appealing to our better selves in your campaigns. You will be missed.

Social Networks: A Real Opportunity

by Anu

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

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

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

Mind of the Market

by Anu

On Friday, we had a lively debate on topics spurred from Michael Shermer's, "The Mind of the Market." Shermer makes a one simple point. Marketplaces are made of up of numerous people and those people are impulsive and emotional, driven by feeling as much as rational thinking.

He points out countless (literally, thousands) studies that show groups of well-educated, thoughtful people making 'poor decisions' because they were driven by emotion. An interesting study focuses on regret aversion. Usually, people will reduce a potential payout if others are equally (or more dramatically) affected. For instance, imagine you purchased a beautifully made latte at your favorite coffee shop. The barista says, "Hey, you ordered the one thousandth latte! Congratulations, you win a free pound of premium coffee. Everyone else in the shop wins the coffee too." Imagine a different outcome. The barista now says, "Hey, you ordered the one thousandth latte! Congratulations, you are the sole winner a free cup of coffee." More than fifty percent prefer the second outcome, even though it's of less value than the first!

Theories like regret aversion and others are helpful in understanding group dynamics. As strategy consultants, so much of our role is to facilitate discussion that leads to innovative change. Before we can influence change, we need to unlock the door to how a group perceives the risk/reward opportunity from innovative changes. Too many times, organizations disable innovation because they view the 'risk' too great. Hopefully, we can bring forward the opportunity for reward as even greater. I believe people that turn Shermer's theories into practice will enable others to view the reward opportunity.

Debate or Participate: A Hybrid Wholesaling Update

by Steven

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

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

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

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

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

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

Tangerines and the Art of Messaging

by Anu

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

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

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

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

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

Ideas by People

by Will

(New Web site, part 1)

So, you might have noticed that we updated our Web site. If you haven't noticed, go click on some of the other pages. Go ahead and do it now-- I'll be here when you get back.

Isn't this a cool site? Interesting pictures, readable text that builds a sense of community and energy, engaged people everywhere you look. We took every single picture on the site, wrote every word, polished every pixel and agonized over the placement of, well, everything.

The page I like the best is About Us\Team, and that page represents an important concept that is central to kasina's brand: people come to kasina to buy ideas of value. They buy them in our reports, our Industry Analysis, our Roundtables, and our consulting engagements. Those ideas are the result of the whole of all of our experiences, not just the business part of our brains. And that ties into kasina's hiring process: hire interesting people to come up with interesting new ways to approach a problem. Everything each one of us does feeds the ideas we have, and so to understand where our ideas come from, we wanted to be sure you met us as we are. That's no surprise to anyone, but it is an important part of what kasina is. For example, I'll always talk about something in terms of taking apart a watch (which I love to do), music (which I collect and create) or my baby boy (who I dote on). So in my picture, you see me and my baby boy (my watch got cropped out and you can't hear the music that was playing in the background). That's me. That's who drives the marketing at kasina.

The same is true for everyone at picture on that page -- since the sum of all our experiences generates the ideas we have, you should know what those experiences are and who we, as people, really are. The Team page shows you how we each see ourselves -- the runner, the foodie, the beer fanatic (those are hops), the optimist... Twenty different people, twenty different interests, one company with interesting ideas.

"Ideas by people" isn't our tagline, but the concept that drove our new look sure tells you we're not your father's consultancy. So take a good long look at the team page and find out who's behind the ideas and solutions what experiences led them to have those ideas in the first place.

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.

Finding Candor in the Blogosphere in an Unlikely Place

by Andy

A recent New York Times article cuts straight to the chase about what makes blogs valuable and popular -- the access to frank and unvarnished insight and perspective. The article focuses on a new blog that Wal-Mart buyers are now posting to that provides unfiltered and candid assessment of the products the retail behemoth peddles.

What is of particular note is that Wal-Mart is world-famous in the retail world for a tight-lipped highly regulated corporate culture. But Wal-Mart is also known for is using technology in effective and cutting-edge ways. As such they have realized no one wants to read a blog propagated by a PR engine. It is not the ability to post information quickly that is the heart and soul of blogging technology; it is who posts the information and the nature of the content that truly adds value. Customers, whether they are in the market for the latest video game or emerging market ETF, want no-nonsense information from those closest to the products, not orchestrated PR campaigns.

The article discusses how Wal-Mart's previous endeavors into the blogosphere were quickly seen as a PR gambit. The realization and adoption of this more authentic online discourse is an illustration that this medium, while registering only about 1,000 hits a day, is one that cannot be ignored. Furthermore, if blogs are to be used successfully, by definition their content must meet these expectations.

This of course presents a challenge for the financial services industry given its highly regulated nature and commoditized product set. Yet, if the retail commodities that Wal-Mart sells in the context of a highly regimented corporate culture have not prevented them from making a legitimate contribution to the blogosphere, it is a clear sign that the financial services industry can also rise to the challenge.

Customized Search: Why Not?

by Johanna

In 2005, Google rolled out a customized search product. Basically, it's an engine that sits on top of the Google platform and allows the search provider (whoever is maintaining the Web site where the search is located) to restrict the domain. In short, the customized search engine cuts down the Web universe based on the search provider's specifications. Two examples include Green Maven's search of sustainable and environmentally friendly Web sites, and The Economic Search Engine, which searches over 10,000 economic-related sites.

Why don't asset management firms use this function? Firms could locate a customized search engine within news or commentary sections, and set that search engine to query both within the site as well as within selected financial services and news Web sites. The search could be product- or sector-specific, and labeled as the "Asset Management News" search, or the "Mutual Fund News and Research" search.

With the Google customized search tool, the search return pages would open in a separate window, but would display the firm's logo. While this option does commit the sin of sending advisors away from the firm's site, it provides a valuable service, and at least gives the firm a branding boost in the process.

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

Turning Services into Products

by Lee

A friend sent me a link to this video about Denmark's Jyske Bank. They have taken some impressive steps to turn their banking services into physical "products" that customers can explore in their branches. Customers can grab a box labeled, for example, "My First Car Loan," and pull out the brochures inside (as shown below). They can also take these product boxes to a "TestBar" counter and scan the barcode on the box, bringing up a video on a computer monitor showing a fun to watch presentation.

Jyske's results have been equally impressive -- they doubled their customer base within a year. It is a shame that more companies don't make it easier (and more fun) for customers to get to know their offerings.

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?

An Airplane by Any Other Name

by Will

This isn't a commercial, but if you aren't getting PR advice from Peter Shankman and the Geek Factory, you're probably not doing as well as you could be.

Why would I say that? I read Peter's book, Can We Do That? for my recent Friday afternoon book report. I'm rarely impressed by PR books -- they're usually full of the same tired information that you could come up with if you just thought about PR for 5 minutes. What makes me so certain of Peter's skills is the fact that, at the end of the book, I was incredibly disappointed that I didn't get invited to his birthday party. Anyone who can make an antisocial, suburbanite curmudgeon like me regret not going to a Manhattan birthday party for someone I don't even know has got to be fantastic.

What I liked about Peter's book was that it reminded me of William Henry Danforth's I Dare You, which, in turn, reminds me of one of my favorite books, Sinclair Lewis' Babbitt. All of these books challenge you to think big, go against the grain of your routine and dare to be exceptional. What Can We Do That? adds to the mix is that it gives you a schematic for gaining the acceptance of your peers and your boss so you can make that splash.

When I finally put the book down, I took a line from the book and started asking everyone, "What's our airplane?" You see, Peter and the Geek Factory said they were so passionate about the results they got for their clients that they'd jump out of an airplane to make that clear to everyone -- and they'd take all their clients with them. So I had to ask what it is we do (or can do) that reflects that passion?

We're working on our answer. Do you know what yours would be?

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