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Distributor Margins Down Despite Bullish Fourth Quarter

By Jesse Mark & Gordon Chen

Despite lingering global economic uncertainty, markets rebounded in the fourth quarter of 2011. The Dow Jones Total U.S. Stock Index posted an increase of nearly 11.5% during the period, and total assets under management in U.S. open-ended mutual funds increased by 6% to $8.0 trillion. Net flows during this last quarter were slightly negative but had a negligible effect on assets.

But recent market gains have translated into mixed results for asset managers. Based on the earnings results from publicly-traded firms, kasina found that industry operating margins decreased from 32.2% in Q3 to 31.2% in Q4, while net margins rose from 20.1% to 23.1%. Both operating and net margins remain virtually unchanged from figures a year ago.

ASSET MANAGER PROFIT MARGINS

The decline in operating margins can be attributed in part to a fundamental shift in investor asset allocation which continued in the fourth quarter. During this period, total flows reached over $122 billion as investors divested themselves of high-fee stocks and turned to lower-risk bonds. U.S. Stock funds saw outflows of $43.7 billion in the fourth quarter, while fixed income funds experienced inflows of $41.1 billion. Though the markets have shown recent improvements, investors remained unsettled by the lingering financial uncertainty. Correspondingly, investors are moving into lower cost index products. Actively managed funds lost $30.0 billion in outflows while passively managed index funds experienced inflows of $22.8 billion.

BREAKDOWN BY ASSET CLASS OF Q4 NET ASSET FLOWS

Asset managers also face increased expense side pressure from distributors. Large broker-dealers are ramping up fees to access their platforms. Morgan Stanley Smith Barney raised base rates to $250,000 per year, per fund family, representing a five-to-tenfold spike in prices. Driving these increased demands are the relatively thin margins that wirehouses earn in comparison to asset managers. This past quarter the spread increased yet again, as distributor margins decreased while asset manager margins remained relatively steady. From 2009 to 2011, the spread between asset manager and distributor margins grew steadily and now stands at 19%. In the coming year, asset managers will likely face increased revenue sharing pressure due to the high spread.

ASSET MANAGER AND DISTRIBUTOR OPERATING MARGINS

Q3 Profitability in Asset Management Industry

By Jesse Mark

Key Take-Aways

Industry Operating Margins: Down 0.7% to 30.6% from 31.3% last quarter
Net Margins: Down 2.4% to 19.8% from 22.2% last quarter
Dow Jones US Total Stock Market Index: Down 12.6% for the quarter

Figures & Graphs

The third quarter was rough for asset managers of all sizes due to market instability stemming from the European debt crises. As always, there is some variation between different firms, but margins have been under pressure across the industry. The margin pressure was largely driven by market movement and was not the result of aggregate fund outflows. kasina's analysis of long-term fund flows shows that 96% of the aggregate decline in assets under management was attributable to market depreciation in the third quarter. Only 4% was the result of a net decline in flows.

Large firms with leading profitability in the third quarter were T. Rowe Price, BlackRock, and Franklin Templeton, while Calamos and Pzena investments were the most profitable of small firms. Some firms, like Legg Mason and Invesco managed to break the trend by increasing their margins quarter over quarter despite weak markets.

Why are Some Firms More Profitable than Others?

By Jesse Mark

Advocacy isn't just a predictor of flows, it drives the bottom line. That's the result of our latest analysis based on data from FA Vision and analysis from financial data of publicly-traded asset managers.

As part of kasina's FA Vision service (done in partnership with Horsesmouth), we ask over 3,000 advisors to indicate how likely they would be to recommend an asset manager to a friend or colleague. "Advocates" are advisors that do business with a firm and would strongly recommend the company to others. Here at kasina we often use advocacy to analyze trends in advisor perception and glean insights and recommendations for how to improve distribution practices. A snapshot of the analysis is below:

How should you interpret the results? Based on the five publicly traded firms that were included in FA Vision, there is a clear positive relationship between advocacy and profitability. In fact, regression analysis indicates that a 2% increase in advocacy increases firm operating margins by almost 1%. These conclusions apply to not only publicly traded firms, but to the dozens of other firms included in FA Vision that are privately held.

While advocacy may be a strong corollary with operating margins (if you increase advocacy, you should see higher margins) it fails to provide actionable insights. So how do you increase your firm's advocacy rate? This is where firms can utilize FA Vision to discover how advisor perceptions of brand and product attributes fare against reality. Firms can then focus their marketing and sales efforts on specific firm attributes to drive their advocacy rate higher.

Tool Time

By Eric Daugherty

Advisors take basic Web content and usability for granted, so firms need to find new differentiators.

2010 marks the release kasina's 12th annual Top 10 Web Sites for Financial Intermediaries report. While we saw a similar cast of characters in this year's Top 10, the features that set the best apart from their peers continue to change.

The table stakes for having a Web site supporting intermediaries continues to rise. Everyone has baseline functionality covered: prices, performance, transactions, fundamental education, etc. What is now setting firms apart is the following:

1. News, commentary and thought leadership: 62% of high producers seek news and commentary on firm sites. Firms are putting a "face to the franchise" and putting leaders - and their thoughts- out front more.

2. Timely educational tools & materials: 48% of advisors go to advisor sites for tools. The best asset manager sites are giving more sophisticated tools that advisors can use to help themselves and their clients.

3. "Shareability": 68% of advisors share online content with their clients. Top firms are liberating content and allowing advisors to share via e-mail, social media, and other means.

Specific firms of note this year include:

• BlackRock retaining the top spot, with interactive tools dedicated to timely market opportunities - for example, an outstanding Roth IRA Conversion Optimizer (see graphic below); and resources that hone advisor expertise and help advisors educate investors.
• John Hancock continuing its run in the Top 10, with timely resources that address current market opportunities - like the Job Changers Resource Center, which gives advisors resources they can use to assist those out of work or changing careers; and ideas on how advisors can connect with clients on current topics.
• Fidelity jumping to #3 based largely on personalized user interactions, which builds loyalty based on learning about advisors' online actions, preferences, and needs.

As is evident from some of the top firms, differentiation is less about having better basic functionality and more about having intelligent things to say, and giving advisors the tools they need to serve clients better. At kasina, we're looking forward to discussing the insight gleaned from this year's report with all of our subscribers. To discuss these findings, or other aspects of the report, E-mail us with questions or thoughts.

Director of Research Eric Daugherty visits Brighttalk to discuss What Advisors Do Online

Watch here:

In July, we blogged about recently released What Advisors Do Online Report (http://kasina.com/blog/2010/07/quality_of_asset_manager_onlin.html).

Asset managers rely heavily on advisors for product distribution. More than ever before, the way to reach advisors is online. Advisors spend more than half of a normal workweek in front of a screen, doing research, e-mail, and other tasks. So, having a strong online presence is vital for firms hoping to cultivate loyal advisors as their advocates. And, advisors now say that the quality of firms' online capabilities makes a profound impact on their product decisions.

Online capabilities have gone from a novelty to an expectation to - now - a potential differentiator. Watch the recorded Brighttalk video above with Tom St. Denis of Brighttalk, Dan Ross, President of Wechsler, Ross and Partners, and Eric Daugherty, Principal of kasina, to learn more about What Advisors Do Online.

Newsflash: Industry Margins Are Driven By...

By Eric Daugherty

...market performance! Some findings are surprisingly unsurprising. The 1st quarter saw a huge dip in the markets, then a huge rebound. On balance, the stock market rose a few percent. So did asset manager margins.

We realize that margins are correlated with the markets. How strong the correlation is was reinforced by the graph below, which maps asset manager margins and overlays the average level of the Wilshire 5000 Index by quarter.

However, just because industry margins rise and fall with the markets does not mean that all firms succeed and fail equally. As you can see below, there continues to be a big cluster of firms earning between 25% and 32% operating margins, but a few firms do better, and a few worse.

So, if firms' operating margins are driven by a largely uncontrollable markets, how do they maximize value? By continuing to rationalize their structures even (and especially) when times are good. All firms cut costs during the downturn, but how many of those cuts will stick? In our Costs of Compensation study last year, we found that firms were split in how they were reacting to the financial crisis - some were in denial, some reactionary, and some making thoughtful, opportunistic change.

Firms who want to boost margins above the industry average need to recognize that, even though immediate crisis in the markets has passed, the opportunity and need to continue intelligent rationalization of cost structures remains. Those firms wanting to earn superior margins should be maintaining fiscal discipline, not just hoping for favorable markets to prop them up.

The Top 10 From the Nugget Man

By Lee Kowarski

For the past year, I have sent out a "Nugget of the Week" e-mail each week containing a short data point from one of our FA Vision surveys. With a full year of nuggets in the bag, I took a look back and selected the "Top 10" most noteworthy findings to remember:

1. The average financial intermediary invests client assets with eight different asset management companies (the exact average # is 8.08). Advisors in the traditional wirehouse channel work with the most different firms (9.87) and insurance reps work with the fewest (5.74). (8/13/09 - from the Q2 '09 benchmarking survey)

2. Across every channel of financial intermediary, the most important attribute of firm's wholesalers is their knowledge about their firm's products, with 68.8% of advisors stating that this is "very important" and only 5.4% rating it "not important." (9/17/09 - from the Q2 '09 benchmarking survey)

3. ETFs now represent 6.1% of financial intermediaries' AUM, an increase of 16.0% over the past six months. Another big gainer was mutual funds on wrap platforms, now representing 20.6% of AUM (an increase of 9.6%). (12/03/09 - from the Q4 '09 benchmarking survey)

4. Ivy Funds once again has the highest percentage of "advocates," according to the results of FA Vision's Q4 2009 benchmarking survey. "Advocates" are financial intermediaries that do business with a firm and would strongly recommend the company. A full 64.9% of Ivy's intermediary customers are "advocates" of the firm (up from 51.6% in Q2). The next highest Advocate Scores were for PIMCO / Allianz Funds (with 48.7% of its customers as advocates) and iShares (with 48.5%). (12/10/09 - from the Q4 '09 benchmarking survey)

5. Over the past twelve months, advisors did 21.6% of their overall production in mutual funds on wrap platforms, compared to 19.3% when the same question was asked six months earlier. Every channel of distribution showed an increase in the percentage of business on wrap platforms. The findings further showed that advisors are doing significant business in products on recommended lists and in model portfolios, and the amount of business in unified managed accounts is increasing. (01/22/09 - from the Q4 '09 benchmarking survey)

6. Financial intermediaries that had met with an asset manager's external wholesaler 4 times in the prior year are 75.9% more likely to recommend that firm than those who had met only twice. At the same time, there is virtually no difference in advocacy between those advisors that had not met with a manager's external wholesaler and those that met with the wholesaler only 1 or 2 times in the prior year. kasina CEO Steven Miyao explored this issue in greater depth on the kasina blog. (03/05/10 - from the Q4 '09 benchmarking survey)

7. The top 6.8% of Independent RIAs represent 47.8% of all RIA assets and average $884.5 in AUM. The remaining 93.2% have the remaining 52.2% of assets and average only $70.7 in AUM. Steven also explored this issue in greater depth on the kasina blog.(03/25/10 - from the Q4 '09 benchmarking survey)

8. When asked to evaluate various companies, Franklin Templeton Investments' prospects saw the firm as more "Dedicated to Advisors," "Easy to Do Business With," and "Innovative" than any other firm's prospects viewed them. These financial intermediaries, who had not sold Franklin Templeton products in the prior two years, also rated the firm second in consistency and trustworthiness out of the 21 firms evaluated. (04/15/10 - from the Q4 '09 benchmarking survey)

9. 77.5% of financial intermediaries now use social media at least occasionally, up from 74.5% last year. 21.8% of advisors visit either Facebook, LinkedIn, Twitter, or YouTube on a daily basis. (04/28/10 - from the Q2 '10 topical survey about online behavior)

10. Currently, 31.2% of financial intermediaries access work information via a BlackBerry, with 9.3% doing the same via an iPhone. 12.5% of advisors that don't currently use an iPhone to access work info anticipate doing so within the next year. (05/20/10 - from the Q2 '10 topical survey about online behavior)

I'd love feedback on the types of nuggets that you have found interesting, what you'd like to see in the future, or any questions about our FA Vision service - add a comment to this blog post or send me an e-mail at favision@kasina.com. And if you haven't signed up for the "Nugget of the Week," I encourage you to do so at www.kasina.com/weeklyfav

Hybrid Wholesaling: Two Questions, Three Models, and Four Drivers

By Eric Daugherty

Now that Hybrid Wholesaling has come of age, it is time to ask two key questions:
1. Are there optimal ways to deploy hybrids?
2. Are they here to stay?

Fortunately for this blog piece, the answer to both questions is yes.

We just published Excellence in Distribution: Hybrid Wholesaling, a study that discusses the future of Hybrid Wholesaling teams. We found some interesting benchmarking data and insights.

• 46% of firms source Hybrids exclusively from the Internal desk
• Hybrids spend 67% of their time selling & servicing, a greater proportion than Internals or Externals
• 57% of Hybrids own their own territories; the remaining 43% operate as part of a team
• Hybrids receive an average 47% of the compensation of an external wholesaler
• Territories for Hybrids average over 2,000 served advisors and $75 million in annual sales, as opposed to the 250-800 advisors we recommend (graphic below).

More intriguing than the data, however, are the three optimal models we recommend to deploy Hybrids. While many firms adopted Hybrids as a means to replace higher-cost Externals (and this is a valid use, for sure), we see opportunities for firms to utilize one of the following models to maximize productivity in the future:

• The Opportunistic Model
Hybrids plug temporary gaps or address new opportunities: vacant external position, retention of assets, or a new geography
• The Spinoff Model
Team of hybrid wholesalers pursues a new channel or product (RIA, DCIO)
• The Team Model
Manage a territory which segments advisors by profitability level and service preference

Another Important Reason for Asset Managers to Cultivate a Presence Online

by Drew Maniglia

As a part of my work on FA Vision, I have recently had an opportunity to look back at the "What Advisors Do Online" survey from 2009. I came across some interesting insights that help put to bed the commonly held belief that those advisors who frequent the Web represent a lower value group. This is a notion that I had heard questioned in several conversations, and I wanted to see if it was true.

In 2009, kasina conducted its "What Advisors Do Online" survey and the respondents had AUM ranging from $1MM to $5 BN, with the overall sample average at $120 MM AUM. The one hundred advisors with the most assets under management (the top quintile by AUM) had an average of $443 MM AUM. Trends focusing on these top one hundred advisors reveal that top producing advisors are indeed frequenting the Web to the same, and in some cases to a greater extent than the average advisor. Of these one hundred top producers, 45% reported visiting LinkedIn, and 42% claimed to use YouTube. In addition to these social media sites, top value advisors are also visiting industry specific sites like Morningstar, Ignites, and asset managers' sites - of the top 100 advisors, 75% visit asset managers' public Web sites, and 91% visit asset managers' advisor Websites. Furthermore, advisors who visit Morningstar.com on a daily basis have average AUM over 90% higher than those who visit the site with less frequency. All of this suggests that high level advisors are quite active on the internet.

I think this is useful for asset managers to internalize. Asset managers have access to a valuable cross section of clients and prospects online, so there should be a strong incentive to focus on Web strategy and cultivate a presence everywhere from LinkedIn to standard industry sites. In doing so, firms will be reaching out to some very worthwhile advisors.

Hot Job Of The Future: National Accounts Manager

by Eric Daugherty

Increasingly, National Accounts Managers (NAMs) are the ones responsible for generating big opportunities for asset management firms. We just published Excellence in Distribution: National Accounts, a study that discusses the rise in importance of National Accounts teams. It's not hard to understand why they are gaining prominence.

Distributors continue to consolidate. Bank of America acquired Merrill Lynch, Morgan Stanley and Smith Barney merged, and Wells Fargo took over Wachovia. On any given platform, there is only finite space for investment products. So, as distributors consolidate, there is a natural rationalization of products. For asset managers, this is a huge risk, and a huge opportunity. While the office to office wholesaling to individual advisors (or teams of advisors) still has to happen, more and more of the huge battles are being for fought for platform placements. This makes the role of National Accounts Manager vital.

More than ever, National Accounts Managers need to be polymaths - adept at multiple functions. They need to be relationship builders and astute strategists when dealing with the distributors, and agile gatherers of resources within their own firms. They need to insure clear and ample communications to multiple parties, and to identify opportunities to marry their firm's products with a distributor's needs. They also need to be technical enough to talk product attributes with research analysts. As you can imagine, finding the right person for the role is of paramount importance.

However, there are other key findings in our report that firms need adopt. Specifically, they need to focus on fewer distribution partners. The landscape of distribution is changing, and dispersing efforts across too many focus firms will just limit chances for success. Firms should be measuring the profitability of each distribution relationship that they have (P&L example below).

Additionally, firms need to insure that the goals and incentives of Sales and National Accounts are aligned. National Accounts drives how product gets placed on platforms. Sales drives how much product gets bought off of those platforms. Clearly, neither of those can be optimized without the other.

Lastly, firms need to put more resources behind National Accounts. Curiously, while 92% of firms expect National Accounts to become more important at their firms, only 68% expect staffing increases, and 48% anticipate budget increases. With fewer, but bigger, opportunities available, those firms who recognize the importance of resourcing National Accounts appropriately, and staffing it with the best and brightest they can find, will win the most profitable placements.

Long term winners in distribution will be those firms who figure out how 1+ 1 >2, how Sales plus a stellar National Accounts team can drive better partnerships, more valuable platform placements, and greater sales. In the meantime, expect to see a big focus on National Accounts Manager hiring and development.

4th Quarter Margins Flatline, but Closer Look Shows Most Asset Managers Continue to Recover

by Eric Daugherty

A few months back, I portended an earnings rebound for asset managers, and the 3rd quarter seemed to bear that out. Now that 4th quarter earnings are in for all the publicly traded asset managers, what do they tell us about the state of the industry?

S&P 500 Level

With a backdrop of largely rising markets (see level of the S&P above), the universe of publicly-traded asset managers collectively managed margins that were only equal to the third quarter. And, full-year 2009 margins still fall well short of 2008 margins.

However, a closer firm-by-firm look shows that most companies' margins bottomed out in the first quarter and continue to recover. This chart show operating margins for all fourteen publicly-traded firms.

Aside from a few aberrations, firms continue to improve their margins as the market environment improves. The few exceptions are Alliance Bernstein (taking a step back this quarter), BlackRock (which incorporates massive BGI figures for the first time), and Legg Mason, Waddell & Reed, and Invesco, who continue to trail the pack. Legg Mason and Alliance Bernstein were the only firms to see assets under management decline in the quarter.

Looking forward, I amend my prior forecast. Previously, I thought that rising markets and aggressive cost-cutting would lead to margin bonanzas. However, recent market events and financial figures lead me to believe that markets will hold steady and the industry will not continue its rationalization of costs and structure. Even if there is a "new normal" per Bill Gross, of lower growth and suppressed asset returns, the pain is too recent and rationalization is too hard to continue unless crisis demands it. A few aggressive opportunists will continue the hard work; everyone else will take a deep breath.

Firms need to continue to focus on rationalizing their structures. The threat of another downturn remains. In addition, regulation, industry maturation, and increasing consumer focus on fees portend eventual margin compression. Firms that prepare now will be set to thrive in an increasingly competitive future - in particular, smarter distribution, use of the web to drive marketing and efficiency, and leveraging emerging channels like social media will increase asset managers' ability to preserve healthy margins as long as possible.

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

by Deb Wetherbee

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

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

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

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

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

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

Wholesalers Find Success by Focusing on Fewer Advisors

by Steven Miyao

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

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

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

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

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

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

Engaging Your Best Performers - NOW!

by Eric Daugherty

The other shoe is about to drop. Your best wholesaler is starting to get calls from headhunters. Your National Accounts Manager is wondering about her next career move. Your up-and-comer just isn't feeling the same zest for coming to work. So, what are you going to do about it?

According to this article by the Conference Board, U.S. job satisfaction is at the lowest level in two decades. Most of the people I talk to can "feel" this inside their organizations - two years of market volatility, minimal hiring, raises, and promotions, contracted budgets, governmental haggling, and a tough economy have taken a toll on the collective psyche of American workers.

Yet, asset managers are back on firm financial footing. Our preliminary estimate of industry margins shows that firms are creeping back towards a very healthy financial state.

Source: kasina - quarterly financial reports of 11 of 14 publicly traded asset managers (those reporting before 2/9/10)

Now that firms are back on solid ground, expect lots of employee movement, with firms looking to upgrade talent, and stagnant workers looking for new opportunities. The game of musical chairs was temporarily suspended, as firms stopped adding more chairs, and workers held onto their current chair for dear life.

Firms recognize this, as shown in this recent Ignites poll. 82% of firms expect "some" or "a lot" of people to leave as the economy improves - wow!

Source: Ignites 1/25/2010

For most firms, losing people is less the issue than the prospect of losing their best people - in other words, those 20% who do 80% of the work (we all know who they are), and the ones apt to have the most opportunities to switch roles or companies. So, what to do?

Simple - develop an engagement plan for each of your top performers. This is pretty easy, and doesn't take much time. Follow this five-step process to insure that your best will stay yours and stay best over the long haul.

1. Identify your top performers - force rank your team and figure out who the top 20% are.

2. Let each of those folks know that they are among your best - no, you shouldn't share the rankings, and yes, you may be giving them leverage in career discussions. So what?

3. Find out what motivates each of them - in most great performers, there are a lot of qualities that seem intrinsic, but we all have external motivators too. Are their motivators work/family balance, prestige, title, compensation, advancement, cool work, recognition from peers, exposure to senior leadership? Ask. They'll tell you.

4. Jointly develop a plan that will serve the firm's and the individual's needs- include milestones, timelines, and specifics.

5. Pull this plan out periodically (quarterly, at a minimum) and review progress- is the person doing what they need to? Is the company meeting its obligations to the high performer?

This process requires candor, listening, and some time. But, if done right, your best people will get the message loud and clear: "You are one of our best performers, and highly valued. We want you with this company long-term, and contributing at a high level. Let's work together to figure out how we insure that." Do this, and while you may lose some other employees as the economy picks up, you will not lose your best people.

Social Media is Here to Stay

by Julia Binder

Asset management firms need to be where their customers are. That's not on their Web sites. It's on Facebook, Twitter, YouTube and LinkedIn.

When we surveyed executives at asset management firms last fall about compliance issues with respect to social media, 73% responded that compliance or legal concerns impeded their ability to participate in social media.

At that time, only a few firms including American Century, Putnam, TIAA-CREF, Vanguard and others had ventured into the lawless Wild West that is social media. They applied existing compliance processes and sought legal guidance to support their as yet limited participation. All waited for clarification from the SEC and FINRA.

Well, FINRA has spoken. And thus, compliance issues around third-party content and record-keeping have been addressed and effectively removed as an excuse to remain on the sidelines. That doesn't mean that firms should dive in without a plan. kasina's newest paper, The Asset Manager's Guide to Social Media, helps firms understand opportunities and challenges associated with social media. You'll find a rich set of examples from the asset management industry and others on:

• Developing a social media strategy,


• Who's doing what and why, and


• Implementing best practices in compliance and monitoring.

The lack of clear FINRA and SEC guidance coupled with the fear of legal repercussions has kept firms from plunging into social media. But consider, as communicators subject to regulation, you are used to building caution into the way you approach all communications.

Social media is here to stay. It's time to review how social media fits into your communications strategy.

Show Clients What They Need: Assets Are Nice, But Income Pays the Bills

by Eric Daugherty

e-Business teams have a huge opportunity to drive improvements in content that clients see. Specifically, when it comes to thinking about retirement, firms do not yet make it easy for clients or advisors to make sense of how their holdings translate into retirement income.

I do not really care about my financial assets - I only care about what they can buy. Asset management firms thus far are not progressive enough in helping investors like me make the connection between assets and future income. In December, this article pointed to a logical starting point - a Senate bill called the Lifetime Income Disclosure Act, which would mandate (for 401(k)s) a calculation of annuity income, similar to what the Social Security Administration does with its annual statements. This would be great, but is only a start.

Most of us have up to three buckets of assets from which we will draw in retirement - and each of the three buckets will have different tax treatment:

1. Pre-tax income; 401(k)s, non-qualified plans, defined benefit plans, for example.
2. Post-tax assets; Roth IRAs and other vehicles on which we have already paid tax.
3. Combination assets; Traditional IRAs and taxable accounts, in which we have some tax basis.

For example, say a couple has $2 million in assets. Sounds great - but is this enough for them to retire and enjoy the standard of living they want? It depends, and requires converting the assets into prospective income streams.

Here's where asset management firms can help. Firms holding these assets have all the information necessary (except the taxpayers' tax rate, which could be asked or assumed) to convert assets into an income stream. Here is how it would work:

This end result (in the Brady's case, $63,420 of annual income) is what investors care about. This is the money they will need for vacations, health care costs, utilities, and food. But most investors will not understand the analysis above, nor will they get it right on their own. They need help - this language of pre- and post-tax assets and annuity streams is foreign to many, and firms should help investors translate this into what matters to them - income. e-Business teams should be thinking about presenting content like post-tax retirement income streams. Even more than slick videos and market commentary will, giving investors content they need will foster loyalty.

2010 Predictions

by Steven Miyao

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

Industry trends:

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

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

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

Strategy and product:

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

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

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

Distribution:

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

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

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

e-business:

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

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

The Best of the Best from the Q4 FA Vision Benchmarking Survey

by Lee Kowarski

While firms shouldn't mimic what they see competitors doing, it is always important to understand best practices and see what can be learned from those efforts that resonate in the minds of advisors. To that end, kasina's 4th quarter FA Vision benchmarking survey gathered responses from 3,003 financial intermediaries between October 19th and November 12th, 2009. As we do twice per year, we asked intermediaries about their investment behavior and asset allocation, as well as firm-specific topics, such as wholesaler effectiveness and brand perception.

Among myriad other findings, some of the firms that scored the highest in the Q4 survey were:

• Most Advocates for the Firm (highest % of intermediaries that would strongly recommend the firm to a colleague): Ivy Funds
• Most Advocates for the Firm's External Wholesalers (highest % of intermediaries that would strongly recommend the firm's externals to a colleague): MainStay Funds
• Most Advocates for the Firm's Internal Wholesalers (highest % of intermediaries that would strongly recommend the firm's internals to a colleague): BlackRock
• Best Value-Added Programs: JPMorgan Asset Management
• Best Sales Literature: American Funds
• Best Conference Calls with Investment Experts: Ivy Funds

If you haven't already done so, I encourage you to subscribe to the FA Vision "Nugget of the Week" newsletter where we share additional findings from FA Vision each week. Also, if you are interested in understanding how your firm ranked (or being included in future FA Vision surveys), send me an e-mail.

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

by Eric Daugherty

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

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

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

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

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

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

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

External Wholesalers, Fewer In Number, Face Rising Expectations

by Eric Daugherty

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

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

• Sales Force Structure and Selling Process


• Territory Management


• Compensation


• Technology Deployment

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

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

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

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

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

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

And Then There Were Ten

by Eric Daugherty

Firms are putting advisors' needs front and center as they upgrade their Web sites.

2009 marks the release of kasina's 11th annual Top 10 Web Sites for Financial Intermediaries report. It's amazing how far firms have come, and how much more vital and vibrant the Web is versus 11 years ago. Back then, firms were still contemplating whether (not how) the Web would become an important client service and marketing channel for them. Today, the notion of NOT having top-notch Web content, tools, and servicing is laughable.

This year's Top 10 Web Sites For Financial Intermediaries had few of the drastic site overhauls that characterized 2008. However, we did see firms striving to meet advisors' needs. In particular:

• Firms are using sophisticated underlying technology to provide a simpler user experience - simplicity through complexity; most notably, this involves bringing content "up" to the users, instead of requiring them to drill "down"
• There is an increasing focus on customization, allowing the advisor to personalize his/her experience and way of interacting with the Web site
• There is a trend towards more interactivity and multimedia content

Specific firms of note this year include:

• BlackRock ascending to the top spot, with a Tool Center that gives advisors everything they need to use the tools effectively with clients, and Conversation Starters that arm advisors with strategies to answer common and challenging client questions



• John Hancock continuing its run in the Top 10, with Dynamic Literature Ordering and a keen focus on its brand
• JPMorgan jumping from #9 to #3 based largely on its simplified presentation of fund analysis via dynamic screening, as well as its Markets Insights program

At kasina, we're looking forward to discussing the insight gleaned from this year's report with all of our subscribers. To discuss these findings, or other aspects of the report, E-mail us with questions or thoughts. Or better yet, use the kasina forum to post thoughts and questions.

Americans Determined To Save More - But Will They?

by Eric Daugherty

This recent article by Money Management Executive details that the financial crisis has led the majority of Americans to resolve to set a financial goal for 2010. Resolutions are good. However, every year I resolve to save more, eat less, grow three inches, get better looking, and become funnier. So far - no good. Aspirations only go so far.

Asset management firms have a prime opportunity to help investors fulfill their resolutions - and grow their own client bases and assets as a result. The key challenge is how to get people to sacrifice gratification now for betterment later. While not exactly a parallel, research into solutions for classic "Tragedy of the Commons" problems sheds some light on the ways in which firms can help investors keep these resolutions.

People will sacrifice today for an unclear positive outcome down the road if they are armed with:

• Information - knowledge as to why their resolution to save and invest is a wise one, and how to do it best
• Identity - a sense of belonging to something important and special
• Institutions - belief in the institutions that help them
• Incentives - rewards for positive behavior

How could this look in the investment management space?

Firms could - and should - strive to promote:

• Programs of education and affirmation, multi-channel, multi-media - on the web, radio, TV, to both clients and prospects alike;
• A sense of belonging to a special club, both within their firms and as part of the larger community of like-minded investors. Social media is an ideal tool to carry out this vision;
• Absolute assurance that their firm is committed to doing the right thing, above reproach, and both economically and ethically healthy;
• While we cannot pay clients to invest with us, we can help them help themselves by devising ways to make better decisions - default 401(k) contribution elections are one example, automatic transfers from checking to savings in the banking world is another.

Firms have a unique opportunity - but one that may recede. I am at the gym every day. The first three weeks of the year, the gym is packed with those who have made New Year's resolutions. By February, there is no longer a wait for the equipment.

Investors have been shell-shocked into resolving to change their behaviors. Firms who can capitalize and help investors follow through on their resolutions will benefit the investors and themselves.

Industry Margins Almost Back to 2008 Levels - With Assets Down

by Eric Daugherty

Last month I wrote about the industry earnings rebound. Now that earnings are in for all the publicly traded asset managers, what do they tell us about the state of the industry?

kasina Revised Forecast for Industry Operating Margins

Firms included: Alliance Bernstein, BlackRock, Calamos, Gabelli Asset Management, Pzena, Affiliated Managers Group, Legg Mason, Franklin Templeton, Invesco, TRowePrice, Eaton Vance, Janus, Waddell & Reed, Cohen & Steers.

Here are some observations gleaned from the latest earnings:

Retrenchment has worked - while we are not all the way back to 2008 operating margins on a full year basis, it's likely that 4th quarter number for 2009 will be even stronger than 2008 figures. Fairly rapid cost cutting and prioritization have combined with the market recovery to land firms in very strong shape financially. Psyches may not have healed yet, but balance sheets have.

It is too early for complacency - our prior forecast was for 3rd quarter operating margins of 31.6%. Actuals were 27.5%. What changed, primarily, was that 3rd quarter operating expenses for these firms were up 6% from the 2nd quarter. With a closer look, this $200M expense increase was mostly driven by three firms, and half of it derives from higher revenue-based costs (e.g. commissions). Another 20% of it appears driven by one-time severance and legal settlements. So, this increase is not cause for alarm, but it is worth watching, as a 6% increase per quarter is clearly unsustainable.

Size matters - we have been talking about the importance of scale for the last six months, and believe it will matter greatly in the future. One notable aspect of the industry financials is that the biggest firms have the same margins as other firms. We know that the biggest firms sell product for lower costs, so they must be leveraging size to effect lower unit cost structures as well, which makes sense. When I split the group into the largest four (Monsters), middle five (Mediums), and smallest five (Minis) by assets, there is little difference in operating margin. The largest firms are just making these healthy margins on a much larger base of assets, creating huge profits.

Not all are thriving equally - among all sizes, there are winners and losers. Of the fourteen public firms, three have operating margins less than 20%, and two have operating margins greater than 40%. These firms' performance persists from quarter to quarter.

Look for more M&A activity - everyone suffered in the downturn. Firms are now returning to thinking about the future. With the industry experiencing improved financials, those firms still underperforming will stand out, and may look for white knights. Given our maturing market and the challenges associated with organic growth, firms with strong balance sheets and a desire to grow will look to prey upon the laggards, particularly those with healthy brand names.

Advisors look alike, but do they have the same preferences?

by Steven Miyao

Most marketing messages don't resonate with advisors because they are not pertinent to their needs. Asset managers need to invest in asking questions that enable advisors to be segmented based on preferences.

Advisors have specific needs
Last week we invited four RIAs to our e-business roundtable. On the surface, the four advisors looked alike: all were from NYC, all were male, and all had about the same amount of AUM. When asked what asset manager content most resonated with them, each had completely different needs and preferences. One advisor got a lot of value out of the business building content that an asset manager sent him, another advisor preferred to get investment ideas and didn't need the business building information.

Marketing messages need to add value
The lesson learned from this advisor panel is that asset managers need to segment their advisors based on their needs and preferences, rather than using demographic information from a CRM system.

Think about your own behavior. What e-mails do you always read?

You only open e-mails that always contain at least one or two things that you are interested in (an example might be the daily Ignites emails). If someone sends you a number of e-mails that don't have value for you, you will stop opening them. Every time these messages pop up in your inbox, you immediately delete them.

In order to have advisors respond to your messaging, the content of an e-mail has to specifically address their needs. This can only be accomplished if asset managers understand what those needs are.

Use your e-mails and the Web site to gather advisor preferences
Profiling advisors is not an easy task and can't be accomplished in one quick survey. Luckily, both e-mail and the Web are perfect mediums to collect data from advisors.

A few techniques to collect data through e-mail and the Web:

• Track the specific messages that advisors open and click through
• Ask advisors to rate both e-mails and Web content with a simple thumbs up or down
• Occasionally ask a single preference question after the login
• Conduct polls and show the advisor how the community has responded to these polls

All of this data needs to be associated with a specific advisor and continuously tracked in order for you to send more targeted messages to that advisor.

It will take time, so get started
It will take time to segment your advisors, but the sooner you start, the sooner you will be able to send targeted messages that will yield more effective responses from those advisors.

Advisors Ramp Up Online Usage, Go Mobile, Get Social

by Eric Daugherty

This week, kasina released "What Advisors Do Online 2009". We found that advisors are spending even more time on online, are increasingly using mobile devices to communicate and access content, and are warming to social media.

This study builds on our 2008 study. The last 18 months of turmoil have:

• Driven advisors online more; over half of advisors have increased online usage by 1-3 hours per week, a quarter by more than 3 hours per week;
• Caused them to see business building and sales ideas;
• Incited them to check client information more and ramp up communications with clients.

Notably, this increased online usage is happening more via mobile devices than ever before, with nearly 80% of advisors using some form of device to access content remotely.

Regarding social media, while usage among advisors is not universal, there are signs that it is increasing, and that a wave of adoption is on the horizon. About 48% and 43% of advisors visit LinkedIn and Facebook, respectively.

While we are all searching for cheap ways to be more effective, one easy way for asset managers to do this is to start building links to intranets, portals, and search engines - and make content accessible from multiple devices. This can usually fit into any strategic plan size.

Here Comes The Earnings Rebound

by Eric Daugherty

BlackRock's earnings are a sign of what is to come. While we might not be back where we started in the market or with investors trusting the industry, we are close to claiming a return to healthy industry profitability.

kasina looks at industry profitability quarterly, using data available from the publicly traded asset managers, and triangulating with news and other insights. Starting in the second quarter, things began looking better for the industry.

That earnings started to rebound in Q2, 2009 is no surprise. In our industry, earnings are a function of assets under management and cost structures. While we took huge earnings hits in Q4, 2008 and Q1, 2009, companies responded by cutting their cost structures, with roughly a one quarter lag to the market turmoil. By the April/May timeframe, most of the cost cutting had been done - right in time for a healthy market rebound.

We anticipate that the drag of 1Q and 2Q, 2009 will still leave full-year 2009 average margins at about 27-28%, shy of 2008 (29.7%). The good news is that the industry is prepared to capitalize on the market rebound and skinnier cost structures and have robust earnings in 3Q and 4Q that are equal to or better than they were prior to the market meltdown. We anticipate 3Q operating margins averaging 31-32% and net margins of 22%, both numbers better than full-year 2008 margins.

With healthier balance sheets and P&L's we anticipate that firms will return to a focus on growth opportunities, particularly M&A and selective product innovation. It is a bit premature to declare that we are out of the woods. Certainly we need to learn lessons from the recent turmoil, there is still downside risk in the market, and there are challenges to regaining public and investor trust. However, it does appear that industry profitability is back on solid footing.

kasina Study Recognizes Top Variable Annuity Web Sites

by Eric Daugherty

In September, kasina released "2009 Top 5 Web Sites for Financial Advisors: Variable Annuities". In the study, we sought to identify the top firms that most effectively leverage the Web to promote and establish their variable annuity presences.

During this Variable Annuity study we learned a lot about which firms are differentiating their products and their websites. The top five firms are: AXA Distributors, SunAmerica, Lincoln Financial, John Hancock, and Pacific Life.

Top site features are diverse and include microsites, product filtering systems, automated forms, calculators, marketing materials and support, advisor sales support, application wizards, and comprehensive market commentaries. The image below shows AXA's product performance graphing function, which gives advisors the opportunity to analyze trends and compare subaccounts.

The last eighteen months have been tough on the variable annuity (VA) business. Consider:

• There are nearly 1500 unique products competing for assets
• Total VA assets declined 24% from 2007 to 2008
• Sales of variable annuities dropped 15% from 2007 to 2008, with Q1 2009 exhibiting another 27% decline year-over-year

With those challenges behind them, we anticipate that annuity providers will continue to innovate, using both their products and their websites. Investors' appetites for products that provide some downside protection or assurance of retirement income are on the rise. Consequently, annuities, and the websites that support them, will be vitally important going forward.

Thinking About Sales Compensation? Listen to Science for 18 Minutes

by Mike Ma

For anyone redesigning a wholesaler compensation plan right now, I strongly suggest spending 18 minutes listening to this TED talk by my BFF, Dan Pink. The crux of this talk is powerful, "There is a mismatch between what science knows and what business does." If you make it through the video, please read on.

There are a couple of conclusions revelant to our undustry that can be drawn from this talk. Given that you are still reading, I am going to set aside the possibility that you don't believe in any of this social science and think that its garbage. With that assumption made, I'll go on to say that we are either admittedly behind the curve as an industry, or that we think wholesaling is not a "Candle Problem," but rather has a "simple set of rules, and a clear destination to go to." I think most sales managers would argue that their team is highly trained in consultative selling and in building empathic, deep relationships with advisors. Neither of these skills is like building widgets, so why are we paying for them as though they are?

I have engaged in many conversations regarding compenation in recent weeks, and have concluded that if we really want to move the dial, we need to change our focus. With the exception of bigger carrots and sharper sticks, what in our compensatoin plans is upping the level of employee engagement? How are we motivating our team to become masterful in the art of helping advisors through rough times? I think we should pay wholesalers enough and competitively. I would further argue that they should be paid handsomely for their work, sacrifice, and contributions. However, we are looking at the wrong dial on the dashboard to determine how we motivate our team. If we can't pay on Autonomy, Mastery, and Purpose (Pink's big three), we can at least move closer by paying for activities and net-like components that meet the wholesaler halfway between gross sales and the HR nirvana that Pink describes.

We don't have to get all the way there, but moving a little closer to what science knows would be wise for management now. Given where the labor market is today, when are we ever going to make a move to a better place for our industry if not now?

Experimentation - It Takes Guts, Pays Glory

by Mike Ma

There are two ways to get fired from Harrah's: stealing from the company, or failing to include a proper control group in your business experiment.
- Gary Loveman, CEO, Harrah's Entertainment, MIT Sloan Management Review, August 2009

Think about that statement for a second. Two quick conclusions can be drawn. First, Loveman assumes that everyone should be conducting experiments in their businesses. Second, if you experiment poorly you are committing an act equivalent to stealing - a pretty powerful statement.

We are in the throes of business planning for 2010. Now is the time to learn from the problems of growing budgets by an arbitrary 10% in fat times and cutting across the board by 10% or more in lean times. Both methods have failed the industry, and we are left to figure out what works and what doesn't. When we arrive at this kind of reckoning, we typically pull our managers around a table and make gut calls about "what we see on the frontlines" or "what will bring us inline with our competitors."

I propose that we start supplementing these important, qualitative discussions with data from experiments conducted inside a firm's four walls. It takes guts to do this, since it requires:

1. A Control Group - As Loveman states, we have to choose to not do something to a segment of our clients or workforce, and that is admittedly hard. It is understandable to think that if something can give us or our team an edge, it should be applied to everyone. But without a control group, you can't know what was received and what the value of the investment was.

2. The Possibility of Being Wrong - In essence, you need to be making bets, and bets are scary, especially if they don't pan out in this economy.

In my talks with executives over the past few weeks, I have started to hear some good ideas on how to run these experiments. The best examples seem to involve starting small in order to gain familiarity with the process and its benefits. By experimenting with different coverage models, value added programs, and e-Mail messaging this year, we can begin to decide what adds real value to our businesses and what can be redlined in good faith.

We need experiments starting now, folks. Otherwise, we are just guessing.

SEC-FINRA Warns Investors

by Eric Daugherty

If your Uncle (Sam) is your (Big) Brother, are you better off? And, how much should governent be doing to protect us from ourselves? These questions arose from the joint SEC-FINRA alert regarding leveraged ETFs and sparked debate in our office last week. On the one hand, some of us are anti-government-intervention and pro-free market. Do we really need Uncle Sam (or in this case Uncle Sam AND the industry) playing Big Brother and telling us what is suitable for our portfolio? On the other hand, the last few years have shown us that there is too much complexity and opacity in financial products, and American investors hold too much in their portfolios that they do not understand.

We will certainly continue to see more of a push for transparency in product details, which is needed. Leveraged ETFs are a perfect example of how a seemingly great idea can actually be a wolf in sheep's clothing. In theory, leveraged ETFs may make absolute sense for investors who are willing to expose themselves to magnified gains or losses. If I am 30 years old, rich, smart, good-looking, and charming (hey, if I'm claiming to be age 30, might as well embellish across the board), believe in the market going up over my 50-year investing horizon, and am willing to accept additional risk, why limit myself to an arbitrary 0-100% stock allocation instead of investing in a 2X market portfolio? This was once vein of the argument in our office.

In concept, it made sense. Then we delved a bit deeper. It turns out that we didn't full understand the intricacies involved in these products. Specifically,

• Even over long time horizons, ETF returns can significantly decouple from the benchmark return
• To maintain the leverage ratio, the ETF must buy into rising, and sell into falling, markets
• Almost by definition, they have high transaction costs, leading to high expense ratios See this slightly dated, but readable (and pro-leveraged ETF) article here that does a decent job of laying out the mechanics.

We have blogged before about the need for certain, innovative products. We hold products up to a litmus test that asks:

• Does the investment fit a particular investor need or solve a problem in a compelling manner?
• Is it reasonably low cost?
• Is it simple, transparent, and understandable enough for the average investor?

All three points here are vital: leveraged ETFs can say yes to the first, but not to the remaining two.

It would be ideal if investors and their advisors would do all the due diligence required to evaluate investment products fully, or learned quickly from being burned. Until then, though, expect this new age of oversight and industry/government collaboration to stick around for a while.

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

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

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

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

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

The report makes three main recommendations:

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

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

Will Your Best People Flee Once Recovery Takes Hold?

by Eric Daugherty

In the next few weeks we will be publishing the results from our 2009 Sales Compensation study. Compiling the data was a lengthy, arduous, and enlightening process. As you would expect, data reveal that quantum changes have taken hold since our last Sales Comp study in 2007. More interesting to me than the data itself, though, is what we heard from the many interviews we conducted with industry executives. Companies reacted to the economic crisis and changed their treatment of employees in a multitude of different ways.

Broadly, companies reacted to the crisis on a continuum that ranges from "duck and cover" (change nothing, wait for the storm to pass) to "opportunistic rationalization" (use the crisis as an opportunity to make needed and innovative change). Most striking, however, is the difference in how companies are treating their employees, particularly their best performers, during the crisis. Some companies continue to reward their best employees handsomely while cutting back the pay or positions of lower performers. Other companies seem to be intent on sharing the corporate pain equally across all employees, cutting pay, perks, and positions across the board.

This latter option is dangerous. While it sounds good, fair, and right to share the pain across the board, the reality is that doing so puts the long-term health of the firm at risk. We all know that top performers add far more value than lower performers (to the tune of 2-4x the level of productivity). The 80/20 rule is real. Top performers are also most likely to continue to work their tails off despite the challenging environment, and may be discouraged if this extra effort yields reduced pay. They are the ones who will have the most opportunities to leap to a competitor if/when the market turns around. Our interviews reinforced that this industry is a tightly-linked network. Your competitors all know who your best people are, and they will snatch them from you if you do not keep them engaged and happy.

So, what do you do when resources are at a premium? We found that a few companies are getting creative:

• Eliminating other roles instead of making compensation cuts for high performers


• Using discretionary bonus pools to disproportionately reward higher performers


• Giving high performers additional responsibility, territories, perks, recognition or other things to ensure they know how important they are to the organization

It would be easy to ignore the threat of turnover these days. There are enough other things to worry about: cash flows, regulation, etc. However, as the financial market rebounds, so too will the job market. The first employees to leave will be high performers who feel unloved. Start thinking about this now, because replacing high performers is difficult.

Creating Emotional Connections With Technology

by Mike Ma

Watch this TED talk from Tom Wujec at Autodesk. It's a good use of 6 minutes of your day. He talks about the ways in which humans create emotional connections and relates them to Web and technology development.

In particular, wait for the ending at 5:35. Imagine if we had applications like his sustainability building demo. What if you could use a portfolio builder that used your image as the main character in order to show a different life that you could be leading?

We've done a lot of research that outlines the ways in which better Web sites produce better sales. However, I think we have just scratched the surface of what "better" means. Right now, we just look at the Web as a cost-effective way to distribute information and data (primarily numbers and text). Which firms focus on using the Web (or any technology) to help explain their individual stories, big ideas, and provide a context for their products? Who is employing an emotional connection in their strategic plan?

Top Mutual Fund Brands - American, iShares, and Ivy

by Lee Kowarski

Today, we announced that our recent FA Vision survey found that the mutual fund companies with whom advisors associate the most positive brand attributes are American Funds, iShares, and Ivy Funds. The results are based on the industry's largest-ever (to our knowledge) survey of financial intermediaries: 3,129 responses gathered from April 2nd and April 20th.

The firms with the highest Brand Association Score in the FA Vision survey are:

1. American Funds
2. iShares/Barclays
3. Ivy Funds
4. PIMCO/Allianz Funds
5. Vanguard Group
6. Franklin Templeton Investments
7. BlackRock
8. Fidelity/Fidelity Advisors
9. JPMorgan Asset Management
10. Natixis Funds

While many of the traditional intermediary-distributed fund companies are viewed positively by advisors, we are glad to see that the hard work of some newer players is being recognized as well. American Funds has certainly established itself as a leader in several areas, including consistency, dedication to advisors, ease of doing business, and trustworthiness. Other firms were also well received, particularly in certain niches. iShares and Ivy Funds, for example, were viewed as exceptionally innovative, PIMCO as especially sophisticated, and Vanguard as the least expensive.

The FA Vision Brand Association Score is an average of evaluations of a firm's brand by advisors who do business with that firm regarding each of the following attributes:

- Consistent
- Dedicated to Advisors
- Easy to do Business With
- Ethical
- Global
- Inexpensive
- Innovative
- Socially Conscious
- Sophisticated
- Trustworthy

If you haven't already done so, sign up for the FA Vision "Nugget of the Week" newsletter to continue to receive insights from FA Vision.

Source: Horsesmouth and kasina: FA Vision

Death of the 401(k) - Misplaced Blame?

by Eric

It seems that many are wondering whether the 25-year run of the tax-deferred retirement savings vehicle known as the 401(k) is over. I believe that 401(k)s are here to stay, but need to be viewed and used in the proper light.

In a recent "60 Minutes" appearance, Rep. George Miller lambasted 401(k) plans as being opaque and rife for excessive fees. They can be. To the financial novice, these plans are complex and confusing. Certainly, more scrutiny is needed to insure that investors understand what they hold and are paying a fair price. This scrutiny will benefit investors, as more transparency will demystify retirement investing and lower fees will enhance returns. Of course, fee cuts will come out of the pockets of asset managers, but those asset managers with reasonable fees and transparent communication will survive this added attention just fine.

Separately, others are saying that losses in 401(k) accounts since the market meltdown proves that 401(k)s have failed as an instrument. This line of thinking strikes me as absurd, akin to my blaming the hammer when I slam my thumb. The tool has not failed. If anything has failed, we as users have. As Alicia Munnell points out in a fantastic piece here, 401(k)s were designed as a supplementary retirement savings vehicle. In addition, they were primarily designed (arising in the early '80s, when Baby Boomers were in their twenties and thirties) to be a tax-deferred accumulation vehicle.

That many sit today with insufficient savings to generate retirement income is more a testament to low savings rates, inappropriate expectations, and user error than to faults of the tool itself. With the additional transparency and fee pressure suggested by Rep. Miller, the 401(k) will still be here to stay as a perfectly good accumulation vehicle. However, they are not the sole solution to investors' needs. Higher personal responsibility and savings rates, and products geared towards retirement income generation, the transition from accumulation to decumulation, and risk reduction are needed to supplement 401(k) savings for many Americans.

Improving Your Distribution Strategy Based on Advisor Data = Advisor Vision

by Lee

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

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

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

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

Regaining Investor Confidence

by Eric

Investors' primary concerns these days are twofold: (1) is my money safe? and (2) does investing still even make sense? Asset managers and advisors used to have to prove the superiority of their products and services. Since the market meltdown and abuses of investor trust, though, the importance of stacking up versus the competition fades to a distant third after the two questions above. If asset managers are to grow and thrive post-recession, they need to face these two questions head-on.

The first of these questions is fairly straight-forward. Investors have heard enough about Madoff and Stanford to be very wary of turning over their money to just anyone. Discerning the real good guys requires some diligence. Ultimately, reputation, track record, social media, feedback loops and ratings, client loyalty scores, and redemption rates will all signal to investors who is trustworthy and who is not.

The second question for the industry is far tougher. Many investors regret having invested their savings over the last ten years (the "lost decade"). Investing in the markets, once taken for granted as a smart thing to do, has yielded poor returns for many investors. However, there are two ways for investors to react to the results, and the difference between these two viewpoints is vital for asset managers.

Some investors infer that they made a bad decision to invest at all. Others see the results as bad outcomes of good decisions, which happen from time to time. This is not just an academic distinction, because it has implications for future decision making. To hammer home the point, offer me an even-money bet based on the roll of a fair die: I win if it comes up 1, 2, 3, 4, 5; you win if it comes up 6. We roll the die, it comes up 6, and you win. Did I make a bad bet? No! I took a risk and made a rational decision that did not work out, one that I would take again as many times as you offered it.

One cannot always infer the quality of the decision merely from the nature of the outcome. Investing in the markets the last ten years did not work out too well, but that does not mean the decision to do so was poor. Inferring that they made a mistake may cause investors not to invest going forward, and this would be a mistake. Over the long haul, substantial evidence indicates that broadly diversified and regular investing in productive enterprises increases wealth. However, how one does so may change.

Some investors have learned that their risk-tolerance is not as high as they thought. For those clients, new products or services may be in order. Structured products with downside protection (e.g. principal protected notes), annuities, or portfolios including diversification beyond the standard long-only style box coverage may give some investors peace of mind and the courage to continue investing.

Asset managers and advisors recognize that investors are emotional. It is human nature to blame decision making for poor results; this minimizes the role that risk plays and leaves us feeling more in control of our destiny. But our rational mind knows that randomness plays a role in determining outcomes.

Therefore, if asset managers and advisors want to continue to thrive, they need to convince people with assets that investing still makes sense, and that investing the last ten years was a good decision with a bad outcome, not a bad decision. Only after making a strong case for their own trustworthiness and the sensibility of investing at all will asset managers and advisors be able to move on to discussing their particular products and services.

kasina to Cerulli: The Internet *Is* Strongly Correlated With Sales Flows

by Mike Ma

There's no evidence that the Internet is increasing sales flows. - John Payne, Cerulli Associates

The "Looking Back" feature of the this morning's Mutual Fund Wire highlighted an article from 2002 entitled "How Does This Web Thing Work, Anyway?" with this quote from Cerulli in it.

The timing was ironic for this quote to appear since the study we released today makes a strong case that the Web not only helps sales, but it can also work with the sales people who are selling funds. I believe that this is very important stuff given the market we are all working in. A picture is worth 1000 words, so I will just show you a chart from the study. The x-axis (kasina Web Index) contains various firms' performance in our last Top 10 Web Sites for Financial Intermediaries study and the y-axis measures wholesaler scale, which we define as (firm intermediary-distributed AUM)/(total number of wholesalers).

I don't mean to start any industry consulting firm beef, but the timing of this article needed to be mentioned.

If anyone wants to discuss, please drop me a line at mwma (a t ) kasina dot com

Bad Bank Podcast

by Corianna

This weekend, while cooking soup for the kasina Soup Collective, I played podcast catch up, and came across an interesting take on the financial crisis produced by Chicago Public Radio. It was a worthwhile 50+ minutes because:

• It's a well-done podcast (click here for other well-done podcasts); an example of what asset managers should be providing for advisors and clients. If you listen, you'll see that the producers manage transform opaque issues into something:
  1. Accessible
  2. Entertaining
  3. Personal
  The tone is realistic, but also kind. It leaves the listener informed, but not hopeless or panicked.
• I learned something new; you might too. Among other things, the podcast makes an interesting point about bailout money and the current crisis: given bank balance sheets, banks might be right to be weary of dolling out dollars to prospective borrowers.

Irrationality and Investor Decision Making

by Corianna

Check out Dan Ariely's presentation (see this link; you have to select Ariely's name from the "video" dropdown). And no, this isn't just because he's on faculty at my alma mater.

Here's why Ariely's presentation is worth 20 minutes of your life: Ariely's work is about human decision making - the driving force behind our economy, and the current economic crisis.

In his presentation Ariely describes how people's decisions are affected by the structure that their options are presented in. For instance, in one study researchers found that, when confronted with a simple decision - delay a scheduled surgery to see if ibuprofen would solve the problem, vs. perform the scheduled surgery - doctors are likely to act "rationally," and chose to delay the surgery. However, when the decision circumstances become more complex - delay the surgery to test for the effectiveness of ibuprofen and an additional medication, versus going ahead with the scheduled surgery - doctors chose not to delay the surgery.

So, why does this matter to asset managers? The key to surviving this crisis will to understand and anticipate investor decisions, which are not always rational. It's a well accepted fact that the structures of 401k plans (for instance, automatic enrollment), have a dramatic effect on levels of participation and the quality of investment decisions made by participants. Now is the time to take these lessons further.

2009 e-Business Budgets Take a Hit

by Johanna

e-Business and e-Marketing teams at asset managers haven't escaped the consequences of the recent market crises.

Out of 18 asset management firms that kasina surveyed in 2009, 67% are seeing decreased budgets from 2008 to 2009. Some firms are being hit especially hard: almost 30% of surveyed groups have had to cut their budgets by over 50%.

Despite this grim picture, the good news is that most teams have maintained the number of staff dedicated to the intermediary channel, and 2 firms are actually increasing their team size in 2009.

However, e-Business leaders aren't throwing up their hands and giving in, and we can look to many new innovations online in 2009 and beyond. In fact, 25% of firms are working on site redesigns, and an additional 39% of firms are working on enhancements to site content in areas such as education and value add.

Furthermore, at many firms, marketing groups are focusing on lowering costs by decreasing the amount of print advertising. Correspondingly, e-Business leaders are focusing on providing more effective online delivery services via e-mail and other technologies, such as RSS.

Stay tuned, in the upcoming months kasina will debut a new research report on how firms can leverage the Web for cost effective distribution. In this report we'll provide guidance on how firms can maximize precious resources.

Twitter comes to Asset Management

by Anu

Twitter began in March of 2006. In two years (only had data up to March 2008), the service has gone onto significant success with nearly 3 million "tweets" each day.

Michelle already brought up twitter versus yammer last week.

This week, kasina joined Twitter at http://twitter.com/kasinaUS. Visit and "follow" our tweets as we share insights from consulting, research, and beyond. We look forward to fellow "tweeps" "nudging" us. If you have any questions about how to use twitter and want to start with an e-mail, send your question along.

From Many Come Ten

by Anu

This month, kasina released "Top 10 Institutional Web Sites for Institutional Investors." In our first review since 2006, the data revealed significant progress. Then, many firms maintained a one or two page brochure about their institutional line of business. Now, our research revealed three key findings:

• Institutional clients and consultants expect the ability to access data on-line. EXPECT. This is no longer a nice to have, but an expectation
• Institutional web sites will play a role in winning RFPs both today and in the future
• Institutional web sites will only be successful if the relationship management is well-trained and ready to direct users there.

There is tremendous discrepancy within our Top 10 sites. The 10th place firm scored 52% of the top firms. Therefore, there is significant opportunity for other firms to jump right into the foray and place in the next ranking.

In the high-tough, high-margin institutional business, firms are creating a world-class client experience to compete and win business. Winning one additional small mandate (e-mail me for the math) results in over $1MM of revenue.

E-mail us with questions or thoughts about the institutional client experience. Or better yet, use the kasina forum to post thoughts and questions.

I Am Mad At Me

by Anu

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

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

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

Net Promoter Score for Wholesalers

By Steven

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

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

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

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

The Net Promoter Score is calculated as follows:

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

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

What the Jets Can Teach You About Staffing

by Lee

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

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

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

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

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 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.

When Fancy Turns to Love

by Tricia

When people ask me what I do, I tell them I look for the moment when things change.

Think about somebody you love. Remember the moment that your fancy turned to love? How did you know that something had changed? Was it something you saw, thought, felt, did?

My friend Ray-Ray is a talented professional chef. She says, "Cooking is like life: it's the judicious application of heat and pressure." She tells me that cooking is about knowing when things change. Good cooks see it. Great cooks feel it.

The human eye is trained to detect motion. For me, real research is about finding that moment when everything changes. Nobody ever wrote a good story in which nobody does anything, nobody says anything, nothing happens, and everything goes on as it had always gone on before.

Good research, great novels, and well-lived lives have in common the arc of a human story. Behind the research question, the variables, the dataset, the hypothesis or the thesis; the qualitative or quantitative approaches, there is a material change in the lives of the protagonists.

Research isn't just the facts, m'am. In the age of Google and wikipedia, anyone can dump a pile of data on you. Real research builds narrative momentum behind the facts. It grants insight. When I'm devising original methods, I'm creating knowledge. What's new knowledge? It's knowledge that didn't exist before I made it. And except for a few notable Greek mathematicians, new knowledge doesn't arrive in Eureka moments; it arrives through diligence, practice, and persistence.

When it arrives, new knowledge, in turn, creates insight. Insight shows me how I relate to myself and to the world around me. It suggests different ways to live and connects to me to my humanity -- sometimes, if I'm lucky, to my happiness.

The kind of research I care about isn't about what we know (or think we know): it's about how we know what we (think we) know. What we know drives what we do. What we do informs how we live. All those things together are who we are.

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.