At NICSA's annual conference in sunny Hollywood, Fla., last week, George Batejan, global head of technology and operations at Janus Capital Group, told a packed room that mutual fund managers will be increasingly going through intermediary channels as opposed to through direct channels.
The comment - while not a breakthrough insight in fund servicing, as intermediaries have flourished for the past decade or so - reflects product proliferation and a booming number of intermediaries (all eager for a piece of the pie) between the actual product and the investor. A need for fund managers to be more "client-centric" was repeated at NICSA, but what is the cost of more and more intermediaries for investors, and are those wirehouses, regional and independent broker-dealers, retirement plan providers and others actually acting in the investor's best interest?
According to data compiled by Broadridge, there are 776 fund sponsors in the U.S. with $16 trillion in assets under management. The market encompasses 16,380 products, 38,160 sales and distribution professionals, more than 500,000 advisors at over 20,000 firms, and 92.4 million investors. Four out of five mutual funds are sold through advisors.
Delegation of investment responsibilities by investors - daunted and intimidated by a rocky market and a too small 401(k) amid money managers promising to add value and others warning of managers being "average" - is perpetuating intermediaries to justify their existence and more levels of fees for investors' peace of mind. That peace of mind is ironic given research that highlights the comparative disadvantage of active management. Research by Vanguard founder John Bogle has shown that an index fund investor may accumulate $366,000 more than an active fund investor in a retirement plan over a 40-year investment lifetime.
"My parents' generation would have fixed the sink if it wasn't working. The boomer generation would get a plumber," says Geoff Bobroff, president at Bobroff Consulting, a Rhode Island-based mutual fund consultant and advisory firm, explaining how the boomer generation is facilitating the trend away from mutual fund products going through direct channels, as Janus' Batejan explained at NICSA. "The benefit of intermediaries to the investor is the perception that they'll do better," Bobroff says.
The fund servicing business is marred by products that are now far more complicated than they were in years past, creating a dependency on intermediaries. Cycles do, however, repeat themselves. As Gen Y uses online tools, drawn to low cost and strong performance that has propelled Vanguard's success, for example, mutual fund and ETF managers must simplify the description of their products to explain their value directly to investors - to truly be "client-centric."