In my conversations with asset management firms over the past many months there is a recurring theme to the discussion of growth challenges – firms don’t feel they are as effective with their distribution efforts as they used to be.
National sales managers, heads of distribution, CEOs, and others in firms large and small are grappling with a distribution landscape that seems to have evolved overnight. In reality, this evolution has been a couple decades in the making.
Thirty years ago, when I first entered the business as a financial consultant (fairly sure that term went by the wayside long ago), asset management distribution resembled medieval warfare. Wholesalers conducted group meetings with advisors in large branch offices or in hotel or restaurant meeting rooms. The wholesaler, armed with the sales material of the current campaign, gave their pitch, asked for the order, handed out their tchotchkes, and moved onto the next meeting. Not much different than loading a large ball of flaming tar into a catapult and launching it over the castle wall. You were fairly certain you would hit something, or someone, of value and reap the rewards.
Oh, how times have changed. Wholesaling took on a more tactical approach over the past 10-15 years. Gone were the fund-specific campaigns of the quarter, replaced with broader-themed investment messages – global opportunities anyone? – highlighting the many ways that an advisor could use one or more of several funds in the fund family to best serve her clients. For some audiences (RIAs or consultants to name two) the approach might be a single fund that captured the firm’s investment message, due to fund limitations within those channels. While the investment options may have changed (non-correlated assets, alternatives, etc.) and vehicles become more varied (funds, ETFs, separate accounts, LPs, etc.), this broad tactical approach is still being used today with declining effectiveness. The medieval catapult has been replaced with the early 1900’s mortar launcher, but the modern landscape calls for a laser-guided approach.
What’s Changed?
There are four key driving forces impacting today’s distribution landscape:
Reduction in the number of broker-dealer firms – According to statistics published by FINRA (Financial Industry Regulatory Authority)1, the total number of Member Firms registered has declined 23% in the past 10 years. So nearly 1 in 4 of the firms that were the bread-and-butter of asset manager distribution efforts 10 years ago are no longer in existence. Coinciding with this decline in broker-dealer firms is the continual growth in the number of RIA firms. However, the majority of new and existing RIAs are smaller firms. The majority of the AUM within the RIA space is held by a small number of behemoth organizations. Rapidly growing adoption of model portfolios across all channels – A recent Wealthmanagement.com article2 cited research from Cerulli Associates showing that the majority of portfolios used within the wirehouse and IBD channels are either outsourced to third party organizations or are managed within the home office, the advisors are controlling less and less of the allocation and fund selection process. The only channel bucking this trend currently is RIAs where two-thirds of firms continue managing their own portfolio allocations and fund selection. Overabundance of passive options – No need to go into detail here, this story is already widely known. This trend has created tremendous fee pressure on all asset managers, especially as the results of many passive options have been strong since 2010. Good returns and low costs cannot be beat with generic marketing and antiquated distribution. Digitalization of advice delivery – This is the force that many asset managers either handily dismiss, or hastily try to take control of, to their own peril. Arguably, digital advice solutions do not provide better investment solutions to meet individual clients’ long-term objectives. It’s easy to make it look that way when low-cost passive investments are doing well across the board, but these solutions are untested in more volatile, difficult markets. Completely dismissing them because of this concern is a mistake. Likewise, acquiring a digital provider and stocking the portfolio models with proprietary funds is a foolish move. Neither acknowledges the major impact digital advice solutions can have on the distribution landscape – bringing dramatic efficiencies to the portfolio allocation, trading, and rebalancing efforts of advisors, allowing them to spend less time on this lower value portion of their business while devoting greater attention to their high value services. What's an asset manager to do when investments become a lower-level focus for a greater number of advisors?
Related: Active Fund Management is Far From Dead
As these forces show, the distribution world is a changin’.
Ignore these trends at your own peril. Continuing to use old distribution strategies is not working and will continue to be less and less effective with each passing quarter. What can you do? There are three key adjustments you can make, starting today, that will re-energize your distribution efforts and allow you to increase your AUM growth with minimal additional resources.
Get your hands on the data – I find that most firms have robust CRM systems, yet make poor use of them. Tracking spouse’s names and children’s birthdays is nice, but is meaningless for advisors who no longer make fund choices. Either through your own market intelligence of your distribution teams', or by working with a market data firm, capture and incorporate the vital data to know which advisors continue to make fund selections and which have made the move to outsourced/home office model portfolios. Use the data – Allow this vital data to focus your efforts on the highest-potential advisor relationships. Sending a wholesaler into a branch full of model portfolio zealots is a waste of everyone’s time. Turn this data into your laser-guided weapon and target your marketing and distribution resources on these high-value advisors. For many asset managers this adjustment means focusing more heavily on RIAs and/or broker-dealer home offices where the greatest leverage can be gained. Upgrade your “story” to speak to the advisors in their language – Stop using the same industry terms and jargon that everyone else does. Your true uniqueness gets watered down when it sounds like the competition. What makes you, your process, your funds truly unique? How does that uniqueness get felt by the advisor and his clients, or the home office teams? THAT’s your “story!” Make what you do all about the audience you are delivering to – you will be speaking their language and your messaging will resonate much more clearly.
The new advisory landscape requires new distribution approaches. The rapid trends impacting advisors in every channel cannot be ignored as the landscape we see today will continue to evolve over the next several years. Becoming more nimble, flexible, and laser-guided in your distribution focus will allow you to prosper today and evolve with the advisory landscape into the future.
