What does BlackRock's bold decision to change the way mutual fund salespeople in the U.S. are compensated say about the provider/wholesaler model?
Earlier this year, BlackRock switched its pay formula for its U.S. sales force from gross to net sales to better reflect the profitability of the sale. While the gross sale model is still the dominant compensation model, many industry experts champion BlackRock's shift as a reflection of changing industry dynamics that include reduced management fees related to ETFs and cheapest share class requirements by advisors.
Many industry executives feel salesforce compensation has failed to evolve and is now out of synch with marketplace realities. "Some aspect of net sales has been used by fund groups for at least the last 20 years so BlackRock's announcement might not be as radical as it appears," says Neil Bathon of FUSE Research. "Also gross sales remains a dominant component of wholesaler compensation models in retail/intermediary channels."
When it comes to wholesalers, employee compensation at 17 top publicly-traded asset management firms accounted for more than a third of the asset-based fees earned by those firms, according to a report by kasina. The report also looked at Franklin Templeton Investments and T. Rowe Price Group.
According to SEI's Jonathan Dale, fund sponsors should consider the transition from gross to net sales models because it would:
* Focus wholesalers on long term, profitable advisor relationships and away from selling the hot product
* Align the wholesaler compensation with the fund sponsor's economic model, which relies on increasing assets, not gross sales
* Increase wholesaler's focus on retention of current mutual fund assets, which is becoming more important in light of ETF proliferation
* Help sponsors that have both ETFs and mutual funds steer high velocity trading advisors to their ETFs and long term buy/hold advisors to mutual fund lineup
* Improve brand loyalty and change marketing strategies for various investor types
The roadblocks, Dale says, include:
* Wholesaler and sales management acceptance of new compensation model: "Sales teams are reluctant to any change that will materially impact their compensation. Sales management is often made up of former wholesalers, who may not buy-in to changing away from the gross sales model," Dale notes.
* Sales team structure: Current wholesaling and marketing model is designed to affect gross sales, not net sales
* Talent retention: The best wholesalers may choose to leave for sponsors that still pay on gross sales
* Data analytics: Omnibus trading environments have greatly reduced the transparency into the advisor community and requires investment in data analytics software to identify trades and advisor types owning the funds