The signs are clear, but few firms are making decisions that will benefit them in the long term. The financial crisis is prompting firms to feel forced to react and make changes to their short-term and long-term strategies.
The industry has already lost $1.3 trillion in assets under management in the first three quarters of the year. Distribution teams are responding by cutting the bottom-performing wholesalers and their national accounts staff. Forty-two percent of firms have already reduced their external wholesaling teams and a full 25% of firms are expecting to reduce their sales and national accounts staff in excess of 20%.
This may solve budget concerns in the short term, but it will lead to long-term competitive disadvantages. Instead of just cutting wholesalers and national accounts managers, firms need to reevaluate their overall distribution strategy and invest in three areas:
* National Accounts at Wirehouses
* Institutional Sales Managers for Registered Investment Advisors
* Hybrids for Independents
National Accounts At the Wires
The signs point to the largest distributors continuing to consolidate. These consolidations only further the importance of the research analysts in the product-selection process. The remaining wirehouses and associated banks are going to rely further on process, rather than individual advisers picking investments for their clients. Assets are going to flow through packaged products and select lists rather than via individual mutual funds.
Surprisingly, only 30% of firms are expanding their national account teams. Due to the heightened importance of analysts at the wires, national accounts teams will drive the majority of assets in that channel. If the average cost of an external wholesaler is $372,000, while the average cost of someone in national accounts is $250,000, one can only deduce the obvious: dollar for dollar, firms will get more assets from their national account teams.
Institutional Sales Managers For RIAs
More of the large adviser teams are moving to create their own registered investment advisory firm. These advisers want higher payouts and more investment discretion, which are unattainable under the current wirehouse structure.
These signs are directing product manufacturers to create dedicated RIA sales forces. Due to the sophistication of these RIA sales teams, they usually operate much more like institutional sales or national accounts teams. Firms such as Harbor Funds have been successful with this approach for years. They have deployed CFA-type salespeople who position their products with the RIAs, and then need no additional wholesaling efforts to support further sales.
Hybrids for Independents
Not all of the disgruntled wirehouse advisers have the entrepreneurial will to start their own RIA. Those that don't, but are still looking for a higher payout and more independence, will move to an independent broker/dealer, such as LPL or Raymond James. In light of this, manufacturers should reallocate some of their wirehouse-focused wholesalers to the independent channel. Firms that have been successful with independents have been developing this channel with hybrid wholesaling teams. Hybrids usually operate primarily from the firm's home office or their home and meet with advisers in person only about 35% of the time.
Specifically for this channel, hybrids are effective because they don't have to travel from one town to another to qualify advisers. They can screen advisers over the phone before investing valuable time visiting them. The results have been positive: In the worst cases, a hybrid gets 50% of the production at 50% of the cost. In the best cases, a firm can yield the same production as with an external, for roughly one-third the cost.
While many expansion plans have been put on hold, distribution executives are already considering low-cost alternatives to maintain adviser coverage. kasina's recent sales survey showed that over the next year, 50% of firms are looking to add internal wholesalers and 42% are seeking to expand their hybrid wholesaling teams.
The financial crisis will divide the winners from the losers. The firms that best read the signs, and that make the right short-term and long-term decisions in response, will be the ones to come out stronger when the crisis clears.
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