BOSTON-DWS Scudder plans to grow with the aging.
And in the race to capture its share of the billions of dollars pouring out of 401(k) and other retirement savings accounts, the U.S. mutual fund distribution channel of German giant Deutsche Bank believes structured products may be its secret weapon.
"These people have a lot of money, and they may feel somewhat uncertain about whether or not the portfolio they have is totally responding to their needs," said Philipp Hensler, managing director and head of distribution for the company. Structured products-derivative-oriented instruments designed to provide a degree of capital protection along with the promise for growth-address those concerns, he said.
For DWS Scudder, the strategy is to take the company's know-how from its successful structured products business in Europe and Asia, to show typically mutual-fund-focused American investors what they've been missing.
"We all know it's a distribution game out there," Hensler said during a presentation at Financial Research Corp.'s Annual Marketing Trends Conference here earlier this month. DWS Scudder now ranks 22nd in size among mutual fund complexes in the U.S. The goal is to become one of the top five, he said.
It's not going to be easy, said Andrew Clark, a senior analyst with New York-based Lipper. In Europe, where the market is more than triple that of the one here, structured products are sold everywhere from commercial banks to even postal stations.
The U.S. is different. "The culture is not here," Clark said. American investors better understand and feel more comfortable buying mutual funds. Until now, the structured product marketplace in the U.S. has been relegated almost exclusively to private equity channels.
But by focusing on the financial adviser channel, DWS Scudder plans to change that. "We're committed to taking the time and spending the money to get it right," Hensler added in a later interview.
Just this year, the U.S. subsidiary of Frankfurt-based Deutsche Bank has hired 24 wholesalers to help, bringing the total headcount to 47 working in house and 75 externally. In addition, executives have toured major U.S. cities to gain better brand recognition, and produced brief web-based videos to circulate to financial advisers and planners.
At stake is a share of the $5.7 trillion FRC analysts expect to pour out of mutual-fund-dominated retirement savings plans and into the open market as Baby Boomers approach retirement.
The needs of these investors, who five years ago had an eye toward accumulation and rapid growth, are changing. The rising cost of healthcare, concerns about inflation and sheer panic that they haven't saved enough has created a huge demand for products that offer security, even at the cost of liquidity or potentially blockbuster gains.
"It doesn't matter where we are in terms of the pig through the python of retirees. There is always a demand for income, and investors always want yield," said Charles White, director of investments for Illington Funds in Pleasantville, N.Y. "Products that want to enhance yield while managing risk are likely to be good sellers," he said.
DWS has a pipeline full of structured products that do just that, said Chris Warren, the firm's head of structured products. Each is designed to satisfy a particular goal, and most are tied to specific indexes. With various time horizons and maturity dates, structured products offer nothing less than a guaranteed outcome. For example, a product with a seven-year horizon tied to an international Brazil, Russia, India, China (BRIC) index would guarantee investors that at the end of that period, they would receive their initial investment, plus 5%.
"You're immunized," Hensler said, and if all goes well, the investor will get an even better return. Such immunity is just what retirees want most, he said. It's just that they don't know how to get it yet.
"These are very flexible tools, but with flexibility comes complexity, and that's the crux of the problem," he said.
Addressing that problem takes educating not only investors, but financial advisers, too, said Keith Styrcula, chairman and founder of the New York-based Structured Products Association.
DWS Scudder's concentration on the market will likely pay off handsomely, as the convergence of mutual funds, exchange-traded funds and other innovative products continues in the quest to capture greater market share, Styrcula said.
Warren pointed to changes in federal regulations governing the prospectuses and marketing of alternative investments, as one tool that will help in this endeavor. Provisions allowing for more concise, plain-English marketing materials will help companies better explain to investment advisers and investors what structured products are, and how they can be used.
Today, the $70 billion structured product market in the U.S. is barely one-third of the size of that in Europe, Styrcula added. Given the rate of innovation and the evolving demands of aging investors, Hensler predicts that by 2010, 30% of all asset managers' earnings will come from products that don't yet exist.
Styrcula pointed to Canada as an example of what may soon happen here. Twenty-five percent of all new listings on the Toronto Stock Exchange this year have been structured products, he said.
The next step is getting those products into investor's portfolios, and that's going to take advisers, Styrcula said.
But advisers are no easy sell. First of all, they are bombarded by new products practically every day, and everyone knows that if a product is too difficult to understand or explain to retail investors, advisers will move on to something else, Hensler said.
Second, many see structured products as gimmicks created by banks that command high fees and bear big tax burdens, Stryrcula said. However, today's structured products are more tax efficient and cost conscious than ever before, he said.
"They haven't bothered to look at the new generation," he said.
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