The financial turmoil in the markets is far from over, and mutual fund firms can expect assets to continue to decline further, investors to remain skittish, and regulators to be reactive well into 2009, experts say.

"From a distribution standpoint, a lot of changes are expected in 2009," said Peter Delano, research area director for the research and advisory services firm TowerGroup during a webinar last week titled "Preparing for 2009 and Beyond: Expected Fallout on the Mutual Fund Industry."

"We witnessed a dramatic change in 2008, but this is just the beginning. How will we react to changing economics and regulations?" Delano asked.

Industry turbulence in 2008, such as the collapse of Bear Stearns and Lehman Brothers, will likely continue, Delano said, with all signs pointing to 2009 as a year of continued layoffs and industry consolidation, including an increase in internal reorganizations or mergers and acquisitions with complementary businesses.

As firms put together their budgets for the new year, they will undoubtedly be looking for ways to control costs and improve efficiency, he said. Some of the cost controls will come from eliminating positions, but most firms are already streamlined beyond their comfort level, as it is. Firms will need to look to advancements in collaborative technology for ways to improve efficiency in the coming year.

"The first thing to go will likely be spending on new initiatives," said Peter Demmer, chairman and CEO of Sterling Resources, at the 2008 SPARK Institute Forum earlier this month. "Participant costs are increasing and pricing will continue to erode."

"Flexibility and strength will help firms survive in the next 12 to 18 months," Delano said. "It's a balancing act of finding efficient processes within the framework of cost control."

The Securities and Exchange Commission's recent passage of the summary prospectus rule [see related story, page one] is about as clear of an endorsement of electronic delivery as anyone can hope to expect.

Investors are becoming much more comfortable finding information on the Internet, and many studies have shown that a growing number of investors prefer e-delivery to snail mail for financial matters.

Many firms are adopting or researching e-delivery solutions to automate inventory management, improve returns on their IT investments and reduce fulfillment costs.

"The cost savings are pretty compelling," said Jeff Levering, vice president of corporate development for NewRiver. "Most fund companies will have direct savings" from e-delivery.

"Once you decide to use it, it's the gift that keeps on giving," Levering said.

Reactive Regulations

"Stand by for more regulation coming out of the economic crisis," Delano said. "Expect to see a lot of back and forth of government policies. As we look into 2009, this is where the real regulation takes place."

For now, the Troubled Asset Relief Protection legislation will require mutual funds and brokers to track shareholders' profits and losses on mutual fund purchases and sales through mandatory, rather than voluntary, cost-basis reporting, Delano said.

Everyone is trying to save money during a prolonged bear market, and fees are often one of the first things to be criticized.

"Regulators are much more willing to move forward with things they had on stand-by," Delano said.

There has also been a push among regulators for more suitability and transparency, he said.

Everyone seems to want to know what's happening with their mutual funds and 401(k)s, and investors have been flooding funds, advisers and regulators with questions, Delano said. Huge losses in retirement plan savings have put pressure on regulators to make sure investors have transparency, he said, but there also needs to be more of a coordinated effort to understand how these interrelationships affect one another.

"There was more than a $63 billion net cash flow out in September, three times the amount that left the industry in August," Delano said. "Given the market conditions now, and all the movement within 401(k) accounts, we will continue to see a decline in cash flows and revenues.

"As we look at the big picture, there will be a lot of turbulence and uncertainty," he said. "The next big driver is the pressure on revenues, which will have a direct impact on mutual fund providers."


While everyone may be uncertain and feeling pressure, Delano said some common themes are emerging, such as the importance of acquiring technology and being prepared to react to regulations.

"It really comes down to governance," he said. Firms need to put some structured decision-making teams in place and prepare them to cope with these changes.

"Get your key people together now and try to take a structured approach," he said, rather than trying to scramble after the fact. "Take a fresh look at how things get done."

Delano said he thinks 2009 will involve a lot of policymaking and comments to the industry, while 2010 and 2011 will see the implementation of these policies.

"A huge part of running a business day in and day out is on sales," Demmer said. "We are always focused on short-term gains. To get through this, we need to try to concentrate on long-term objectives. We should try to link everything we do to long-term results and participants."

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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