Financial advisers feeling neglected by their wholesalers over the last year are not alone.
Although mutual fund and annuity companies are spending more on their marketing efforts, strategic changes in the industry mean that financial advisers are seeing less of them.
This is despite preliminary results from a study by Coates Analytics, a consultant based in Conshohocken, Pa., that focuses on sales and marketing, which found that distribution costs of annuities and mutual funds are fairly stable. Partner Frank Coates said marketing, which makes up about 7% of total costs, represented the biggest increase in spending, although final numbers weren't yet available.
The Invisible 7%
That finding of steady distribution expenditures, however, flies in the face of reps' perceptions that wholesaler activities have been declining over the past year. An informal survey by sister publication Bank Investment Consultant found that reps have noticed a marked decline in their interactions with wholesalers, especially on the mutual fund side.
Rick Morris, an investment financial adviser at Liberty Bank, in Avenel, N.J., said wholesalers used to spend quality time with reps and their customers both inside and outside the office to forge both a relationship and business partnership.
"They used to do all that stuff 12 months ago, but it's been in steady decline since then," Morris said. "Whenever we called for support in the past, there was never any hesitation. Now, there's always a discussion first."
Why the neglect? Mutual fund and annuity companies have had a challenging time over the last four years. A turbulent stock market, historically low interest rates and multiple financial scandals have all dampened the sales of packaged financial products. The scandals also have inspired a new regulatory zeal, prompting the mutual fund and annuity-providing insurance companies to eliminate any hint of conflicting interests.
Given the cyclical bear market of the last several years, and the resulting malaise of retail investors, it's a wonder that wholesalers didn't pull back sooner. But the regulatory crackdown has been even more problematic, with new rules and scrutiny on breakpoints, B-shares and variable annuities. Indeed, regulators have sent a clear message that selling the hot product of the month carries risks, and the mutual fund and annuity companies have heard it.
"If ever there was a time we were deemed to be product pushers, we're trying to change that," said Jim Stueve, director of retail sales for AIM Investments of Houston. "We're trying to deepen our relationships with advisers; get to understand their practices."
AIM has instituted compensatory incentives for wholesalers to sell a broader array of products, in addition to paying them the same commission across all product lines, ranging from separately managed accounts to plain-vanilla mutual funds. And it is emphasizing reps' use of asset-allocation models, as well as educating clients and advisers about products, Stueve said. That often takes the form of seminars.
"So, the wholesaler has become less of a transaction mechanism and more of a general practitioner who tries to understand the adviser's practice and how we can assist," said AIM's director of retail sales.
But seminars tend to focus on long-term investment strategies and include little tactical intelligence for the rep. The times may dictate that investment management companies take such an approach, but reps miss the traditional plums wholesalers once offered: new business and sales ideas.
Steve Amarante, president of Farmington, Conn.-based Infinex Financial Group, a third-party marketer supporting reps in community banks, said his firm's policy is to avoid using wholesaler dollars to pay for dinners with potential customers, or even referral sources.
"Where we've been impacted is the ability to share ideas. A wholesaler who comes in and talks just about products won't be successful," Amarante said. "But good wholesalers, especially in the bank channel, will bring ideas to the table that will help brokers think differently about how to assist customers." Wholesalers are going around talking to 100 reps, so they're going to find some kind of model that's working somewhere, and they can share that idea, he added.
Pounding More Pavement
Amarante attributes the current decline in communication to the investment management companies using fewer wholesalers and stretching them over larger territories or more than one distribution channel.
Coates' study found expenditures on wholesalers to have remained largely the same, although he noted indications of a high turnover rate, which may explain the drop in rep contact as new wholesalers find their footing. In addition, newer wholesalers simply lack the experience of the battle-hardened ones and may resort to emphasizing products in lieu of more insightful sales-related information.
Louis Glaser, an investment consultant at SunTrust Investment Services, Atlanta, said he gave up meetings with roaming wholesalers in favor of maintaining contact every six weeks or so with a few favored ones.
"I try to get from them what their fund managers think is happening with the stock market, interest rates and global events - the same kind of information I gather from our own internal analysts and economists," Glaser said. "What I'm trying to do is not so much sell products but rather [take] a concept. Long-term wealth or protection of assets is much different than a hot international bond fund."
Glaser, in fact, appears to be the type of rep that wholesalers operating under the new paradigm are looking for.
"One of the interesting things we're seeing is a real shift away from compensation tied to gross sales, and a shift toward putting assets into funds that are sticky,'" Coates said, explaining that sticky assets stay in an investment for a long time, thereby increasing the size of the fund or annuity and ultimately lower expenses per investor.
Doing the Right Thing
"That's in large part due to the change in the regulatory climate and the extension of doing the right thing for the shareholder, who not only wants to see a good return but a growth in fund assets, because that will reduce fees for all shareholders," Coates added.
In terms of new marketing expenditures, Coates noted his study reveals a 50% increase in costs related to printing and product support materials. The new expenditures mainly applied to new product rollouts, such as new features to existing annuity products and closed-end mutual funds.
CRM Replacing People
Some money managers have also spent more on technology in recent years, he added, although that's still a small part of the wholesaler budget. Nevertheless, extending customer relationship management (CRM) systems to wholesalers in the field may explain, in part, the apparent drop in the number of reps and the larger territories some of them are covering. In addition, top money managers have "cleaned up their databases," to be sure their wholesalers are getting good information about the reps they deal with and their investors, Coates said.
"So, now you're going to see a dramatic ramp-up in productivity from wholesalers, who are tackling their activity more effectively," he said.
(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.