Fund Companies Must Expand Offerings Beyond Funds

To retain assets in what is expected to be a continued flat market, mutual fund companies must continue to diversify investment options to include hedge funds, exchange-related funds, private equity, funds-of-funds and even real estate, according to Deloitte & Touche's Global Financial Services Industry Outlook. As well, these have become accepted assets in many portfolios, the report noted.

"Once, having a sold lineup of mutual funds was enough, but investment management firms will need to be prepared to offer investors a wider variety of investment options if they are to retain their assets," the report said. At the same time, however, firms will likely cut back on the number of mutual funds they offer, limiting them to those with the best performance and largest assets.

"There is a below-average rate of return for stock and bond markets, so how can we make returns in a not-so-bull market?" Chuck Ballou, president of Asset Planning and Management Research, told Central Ohio Source, commenting on the report.

Due to increasing regulatory demands, smaller asset management firms will likely encounter difficulties in providing quality customer service in 2005. Regulatory issues will continue to divert resources from client service toward the time-consuming and expensive cost of compliance, particularly at smaller firms.
Fund companies may resume expansion plans for Europe and Asia, where returns are projected to fuel stronger asset growth than in the U.S. And the trend to outsource operations offshore and make strategic IT investments to bring down costs, will continue.

Scrutiny of sales practices is fundamentally altering the structure of the third-party distribution model for funds. The movement is away from a commission-driven sales process towards one that is fee-based. Such a strategy better serves clients, Deloitte & Touche officials told Central Ohio Source, because it keeps the focus on the primary goal of managing a client's wealth rather than charging a commission for a single transaction.

In addition, the annual Deloitte & Touche outlook indicates that some brokerage firms are getting ahead of regulatory investigations. In the spirit of Wachovia Securities, which in 2003 provided its clients with details about the firm's relationships with mutual fund companies, more brokerage firms are attempting to openly communicate the particulars of their mutual fund sales practices with investors.

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Money Management Executive
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