WASHINGTON - Everybody knows that, with more than half of all U.S. households holding a stake in at least one mutual fund, the U.S. fund marketplace is saturated. Is there anything fund executives can do about it?
In a session titled "Accumulating Assets In a Challenging Environment," the Investment Company Institute posed this question to a panel of executives during its annual general membership meeting here late last month.
Panelists agreed that in order to woo investors back into actively managed portfolios, firms must offer a wide variety of choices to investors, including 529 college savings plans, individual 401(k)s, separate accounts, wrap programs and products specifically designed for retirees. Firms must also behave more like consultants capable of solving investors' problems rather than marketers simply pushing products, speakers said.
The "perfect portfolio" will come to be regarded as a mixture of vehicles, including separate accounts, mutual funds, exchange-traded funds and individual stocks, said Robert Eaton, managing director of retail marketing for Merrill Lynch Investment Managers in New York.
Certain types of investments, such as separate accounts, will no longer be intended for distinct market segments, Eaton said. "The vehicle boundaries are going to come down," he said. "We need to reorient how we think about the business along customer lines."
For example, a broker could discuss 529 plans with a retired couple who might want to purchase one for their grandchildren, said Jay Lewis, who heads Nathan and Lewis Securities in New York. The 529 plans are a "great opportunity to bring to the client something they want to hear about. It's a great opener," Lewis said.
However, a firm can't be "all things to all people," Eaton said. Rather, a company should try to achieve a "certain level of scale in terms of asset classes and vehicle breadth" for specific consumer target groups.
In fact, Eaton said the whole approach in the industry is shifting from a product-driven model to a consultant-like approach where companies learn what their clients want and then figure out strategies to deliver those solutions.
"We are migrating away from a world where wholesalers go out and say, I don't know who you are. Just buy it,'" Eaton said. Instead, the business is moving toward an approach of, "We know who you are and we know what you're interested in in terms of asset classes,'" he said.
Wholesalers will increasingly achieve this by using Web-based databases, he said. Still, Web sites will never replace wholesalers altogether. "Without people contact," Eaton said, "Web sites don't get looked at by financial advisers."
Echoing an idea that has become common knowledge in the fund business, Eaton said that "the trend is toward advice, toward an understanding that the financial world has become so complex that you need an adviser."
He said that 83% of mutual fund sales are through intermediaries, up 5% in the past decade. "We've never found the story for active management more compelling than it is now," Eaton said.
"Investors have lost confidence in doing it themselves," Eaton said, and so they might be willing to move back into actively managed accounts if they have some coaching.
The key question, Lewis said, is how the industry will get half of its assets now invested in money market accounts back into actively managed accounts. Lewis suggested aggressive programs that would create incentives for investors to move their assets out of money markets. One example, he said, would be the option of guaranteeing returns or simply returning investors' money after five years if performance lags.
"With money market rates the way they are, that's not much of a loss of opportunity," he said. "I'll pay the 50 basis points more to get the consumer back to actively managed instead of on the sidelines."
The other factor in herding investors off the sidelines is totally out of the control of fund companies and their intermediaries. Asked about how recent events, such as the terrorist attacks of Sept. 11, the bankruptcy of Enron and the legal woes of Andersen have affected investors' confidence, Lewis said that even brokers are "confused and depressed" - not just clients.
Lewis said that fund companies need to stress to investors "this too shall pass." He urged fund companies and financial advisers to "stay in contact" with their clients, "if only to commiserate."