Fund companies have learned that retaining assets can be even more important than attracting new assets. Predicting which customers' behavior patterns signal they are about to jump ship can often help savvy fund sponsors intercede and possibly avert redemptions. That's one area where customer relationship management technology (CRM) is useful.

CRM technologies allow companies to drill down and collate information about each individual customer from across various departmental databases, the first and most difficult aspect of CRM. To help fund companies predict which fund investors are "at risk" for flying the coop, CRM is applied here not only by culling the usual name, addresses, and social security number, but also the customer's investment-style preference, most recent trades and other historical data. Once the data is merged, a unique profile of that customer can be derived, said Ellen Joyner, global industry strategist, financial services, with CRM provider SAS of Cary, N.C.

Step two includes deciding exactly what to do with all of that data, Joyner said. Most typically, fund companies group customers with similar behavior patterns together.

The next step allows fund executives to put each broader customer segment under a microscope and decide which ones are profitable and which aren't worth a dime. "Unless you know who is profitable, you can't properly allocate resources," Joyner said.

Once profitability has been determined, past history and transaction patterns allow fund sponsors to predict which customers will likely redeem, or which have more chance of staying put for the long term. Companies often use an attrition scoring system that predicts the probability any given customer will leave, and while the system is not foolproof, most CRM systems can monitor how accurate those predictions were.

Red Flags

Armed with this information, fund personnel can watch for red flags, such as when a highly profitable customer is showing early signs of redeeming. In such cases, tailored marketing can begin, to try and convince that customer to remain on board, Joyner explained. Of course, if an unprofitable customer exhibits recognizable redemption signals, it's up to the discretion of the fund company whether they want to intercede or not.

Each fund company must determine for itself which variables are the most important, Joyner added. Moreover, in assessing a customer's profitability, fund companies must think long term and consider an individual's potential profitability, she added. A Gen-X investor may not be profitable now, but may become quite valuable down the road (see MFMN 11/04/02).

The Dreyfus Corp. of New York can attest to the value of predicting defections. In 1997, the firm was facing a huge redemption problem and hoping to stem the tide (see MFMN 6/5/00). So it adopted SAS's CRM system to both increase customer servicing and increase asset retention. Dreyfus now boasts a natural redemption rate of only 6.9%, versus the broader industry's redemption rates of 22%.

Dreyfus executives began by collecting and analyzing all customer data. They then divided investors into "life stages," including knowledgeable, self-directed investors 40-55 years old; those in their "golden years" living in retirement; and "street savants," defined as those just coming in to make a quick buck, explained Prassana Dhore, EVP with Dreyfus.

Dreyfus then analyzed each customer's past behavior, and placed each into seven profile groups along a spectrum, based upon these demographic groups' redemption history. Profiles went from "majority redeemers," who redeemed most often, to those judged "accumulators," indicating they were not redeeming but, rather, adding significant assets. Results showed that most of the fund group's redemptions were executed by a small percentage of investors, Dhore said.

Those analytics allowed Dreyfus to then determine each investor's profitability, and decide to take no actions to pursue and retain investors judged to be profit-chasing street savants.

Knowing what life stage a customer is at also allows the firm to peddle specialized services to customers, Dhore said. A customer in their golden years may be offered trust services, for example.

Don't Call Us, We'll Call You

Based upon these segmentations and predictive models, the firm can decide to implement a proactive asset retention program, which may include a direct mailing followed by a phone call. Or, the firm will take a reactive approach and chat with the customer only when he or she calls in, Dhore said. Overall, efforts have allowed Dreyfus to predict which investors will bail within three to six months with an 80% to 85% accuracy rate.

Despite good results, there are challenges, Dhore admitted. Segmentation is impossible on accounts opened through omnibus channels, such as the supermarkets of Charles Schwab and Fidelity, where the customers are unknown. Moreover, modeling isn't as useful on money funds, which are used to temporarily park cash. In addition, Dreyfus has found that overall, retaining assets is now more costly to the firm than attracting new dollars.

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