The rise of fund supermarkets poses a tough balancing act for asset managers.
Firms seeking access to a significant number of investors must be present on these platforms, since funds are rarely sold directly anymore. But gaining access to such fund supermarkets - led by custodial giants Charles Schwab, Fidelity, Pershing and TD Ameritrade - has also led to increased costs for fund managers.
"The supermarkets have changed the way people access mutual funds," said Bob Dorsey, co-founder of Ultimus Fund Solutions. "They really have become the 800-pound gorilla."
Dorsey, whose Cincinnati-based firm provides fund administration and distribution for 35 fund managers, notes that the fund supermarket model has had a major impact on the number of investment products and the pricing structure of asset manager products.
"[Fund supermarkets] definitely changed the game," says Aaron Izenstark, co-founder and chief investment officer of IRON Financial, who pointed to the rapid expansion of ETFs being one big impact of the fund supermarket trend.
In addition to increased costs, the fund supermarket model is also pressuring asset managers in terms of how they design funds. Dorsey says to satisfy financial advisors who control the relationship with those invested in the funds, asset management companies are forced to create multiple levels of share classes. This includes load funds with 40 basis points and 12b-1 fees used to finance expenses charged by the fund supermarket that Dorsey points out have not proven successful so far.
"You now have a lot more share classes to meet the many distribution channels," Dorsey says. "The industry has tried to create more share classes to combat the supermarket model."
LACKLUSTER SALES
Seven newly launched mutual funds with multiple share classes on Fidelity's platform have struggled gaining assets, according to data provided by Lipper. "Some of the lackluster sales could obviously be attributed to market volatility and their lack of a performance track record. But the fees would certainly play a role," says Barry Fennell, senior research analyst at Lipper.
Fennell adds that as mutual fund supermarkets have gained wider acceptance from investors, asset managers can now promote certain alternative products that follow strategies to a retail audience that were once largely accessible only to hedge fund investors. He cautions, however, that sometimes too much access can pose problems.
"A dramatic rise in the number of choices available to platform investors heightens the utility of these platforms for some but also can overwhelm many," Fennell says. "For example, Fidelity's platform currently offers 228 funds under its 'alternatives' fund type screener and 188 under its sector equity fund options. At what point does too much choice and access become an impediment for prudent investing, and for the platform's appeal? That might be a question for supermarkets to consider."
Mark Redman, vice president of Huntington Asset Services, says many fund managers want to get access to major platforms but are challenged by the high entrance fee. Costs vary at different platforms with each having its own entrance fees and monthly minimum requirements, which are often negotiated based on demand, according to Dorsey. Jeff Strange, director of research at consulting firm kasina, says the costs to get funds onto major platforms like Charles Schwab is typically around 40 basis points.
"Everybody has that mentality that you have to be on Schwab, you have to be on Fidelity or you have to be on TD to be successful," Redman says. "However there is a significant cost to gain entry onto these platforms."
Redman says fund managers he works with have become more open to joining secondary platforms like E-Trade, Scottrade and Cambridge along with independent broker-dealers. He works closely with clients on their fee structures so they are best positioned to enter the supermarket arena.
"It is fine going to a Scottrade or E-Trade if you know which advisors use these platforms and can dedicate resources toward selling those products," Strange says. "It depends on the firm finding the right fit of distribution resources and their platform."
Strange adds that while entrance fees can be tough to overcome for some asset managers, the supermarket model has opened up more opportunities. "It has leveled the playing field for fund companies by not having to wait for a slot to open up."
WHOLESALER RESPONSE
With many smaller financial planning practices choosing to custody assets, they have access to online tools from the custodian but not much investment support. Gaining new importance as a result, wholesalers make more of an effort to earn their CFA or CIMA designations, Dorsey says, so that they can be as knowledgeable as possible when dealing with more investment professionals than the average individual investor.
"In today's world of liquid alts and distribution focused on the financial consultant and planner, the wholesalers tend to have an investment background instead of a sales background," says Dorsey. "Over the years, really good wholesalers have made the transition from being a sales person to being a financial consultant to the intermediary market."
Izenstark says there has been a heavy focus at his firm of late to make sure wholesalers have at least a CIMA designation so they are best positioned to educate advisors.
"From talking to advisors, they want someone who has expertise and bring ideas to the table," says Izenstark. "It's good for the industry."
