While I was setting up office space for my new marketing firm, Sondhelm Partners, I had the opportunity to go through boxes of material from the many investment companies with whom I have worked over the past 20 years as a marketing strategist. This trip down memory lane made me stop and consider how technology, the popularity of defined contribution plans, increased competition from ETFs, and index funds and the decentralization of the intermediary market have transformed the way fund companies market and sell their products to investors and advisors.
I don’t think it’s a stretch to say that the industry has undergone more seismic changes since I joined it in 1995 than in the previous 50 years before it.
TAX INVESTING SHIFT
When I started, most people bought mutual funds as taxable investments, But as the decade progressed, IRAs and DC plans became the primary vehicles for mutual fund investing. In 1994, 22% of all DC assets were held in mutual funds; by 2014 that percentage had increased to 55%, according to data from the Investment Company Institute. With these plans effectively removing lower-net-worth investors from the direct-sold market, advisors have become the primary resource wealthier investors turn to for recommendations of individual mutual funds.
INTERNET’S RISE
The internet has enabled anyone to instantly execute investment decisions without the need of intermediaries. Of course, this empowerment also allows them to make costly mistakes, which has helped many advisors remain in business as “damage control” specialists.
COST IS KEY
Growing dissatisfaction with the lackluster performance of actively managed funds, the increasing popularity of index funds and the transition of many advisors from commission-based to fee-based compensation models have compelled many active fund managers to lower fund expenses and launch their own index fund options.
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ETF EXPLOSION
ETFs have emerged as the most serious competitive threat to mutual funds. While the net growth in the number of mutual funds has been modest since the start of the 21st century, the ETF market has exploded, growing from 198 options in 2003 to nearly 2,000 at the end of 2014, according to ICI.
GATEKEEEPERS
In the 1990s, wirehouse reps were the primary intermediary target audience for fund companies. Today, fund companies must tailor their sales and marketing approaches to gain consideration among a wide variety of gatekeepers, including CIOs at RIA firms, independent broker/dealers, DC record keepers and TAMPs.
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WHOLESALER CHALLENGES
With advisors able to conduct most fund-related research online, wholesalers can no longer get away with the traditional “product pitchbook” meetings of the past. The shrinking number of advisors who still meet with wholesalers expect them to serve as proxies for portfolio managers, delivering detailed attribution of fund performance and market insights.
FUND ‘AMBASSADORS’
With the rising cost of distribution, nearly all but the most successful fund managers have had to increase the amount of time they spend discussing their strategies and results with advisors — and sometimes investors. Firms also leverage digital engagement strategies to build awareness and visibility for their people and products.
BRAND-BASED ADs
Until the past decade or so, print advertising dominated fund companies’ marketing budgets. Ads promoted products and performance, and only print could provide the space for lengthy legal and compliance disclosures. In recent years, most of the large fund companies have added TV commercials to their advertising mix, bypassing the disclosure issue by focusing on brand awareness, rather than performance.
THE FUTURE
Now that I’ve discussed how the industry has changed, I’m going to go out on a limb and make a few predictions on how the industry will change by 2025 —the year I reach my three decade anniversary.
Consolidation among actively managed fund companies: Funds and fund companies that fail to attract investors will close or merge.
The demise of advisor-share classes: The failure of most actively managed funds to consistently outperform their benchmarks will make it increasingly difficult for broker/dealers to justify these funds’ sales loads and 12b-1 fees. And thousands of registered reps will become investment advisers.
Greater specialization: Advisors seeking to differentiate their practices will turn to niche and boutique firms for specialized investment strategies that cut across asset classes and styles, much like smart beta and target date funds do today.
Whether any of these predictions come true, or not, there’s one thing about this industry I can say with complete confidence: Expect change.