Management partnerships between broker/dealers and fund managers are part of a trend that is spawning new funds that are being sold through competing broker/dealers, according to industry analysts and executives.
"It is relatively new and I think it indicates a change in mindset from the standpoint of the people that own the money management expertise," said Keith Hartstein, director of sales and marketing for John Hancock of Boston. "Two or three years ago ... the broker/dealers were quite content to have their proprietary funds sold through their proprietary broker/dealers and there was kind of an exclusivity to that and they weren't really
looking for outside distribution. Today, that's changed."
Increasingly, broker/dealers are joining with asset managers in order to take advantage of their investment expertise and widen their distribution, he said.
While broker/dealers have long sold their own proprietary funds, and those of fund companies, they have not jointly managed funds with other companies. Under the new arrangements, while the brokers/dealers and fund companies share management responsibilities, and fees, the fund companies' names are used to identify the funds and not the broker/dealers' so that the funds can be distributed through a range of broker/dealers.
That could have an enormous impact
on how funds are distributed through broker/dealers, according to Paul Held, a consultant with Cerulli Associates of Boston.
"People have paid a lot of lip service to open architecture, i.e. being able to distribute everything everywhere, but we haven't really seen that yet," Held said. "But this is one way that you may see it start to happen."
Sales of broker/dealer proprietary funds have declined rapidly in the past five years, according to Hartstein. Broker/dealer sales of proprietary funds used to make up 80 percent of their sales, but today that number has shrunk to 40 or 50 percent, he said.
Broker/dealers have suffered a decline in proprietary fund sales because of their products' diminishing popularity with investors and broker representatives, Held said.
In fact, most brokerages are beginning to realize that their funds cannot compete with fund companies' more recognized and trusted brand names, said Kunal Kapoor, a senior analyst with Morningstar of Chicago.
"Clearly, with a few notable exceptions, big brokerage firms haven't done well in the mutual fund business," he said. "The key issue is investors don't trust them. If you ask them what they want to buy, most retail investors say Fidelity or Vanguard. You won't hear any of the brokerages because their record just hasn't been as good. I would go as far as saying this has been a wasted opportunity for them and they are now rushing to [establish] these partnerships."
The broker/dealer and asset manager partnerships are attractive to both sides, said Held.
"The asset managers get the benefit of the added distribution a broker/dealer offers, and the broker/dealer benefits from the fund manager's investment expertise and name," he said. "The point is, the brokerage company is able to say, Hey, I'm going to offer you the added push and lots of support for distribution in my own system. But, I'm going to have your name and your reputation for quality of asset management so my reps aren't going to perceive this as a second-class product like they do my proprietary product."
And because the co-managed funds do not carry the broker/dealer's name, they can be sold through other broker/dealers, Held said. Held calls the co-managed funds "crypto-proprietary" because they do not carry the broker/dealer's brand name.
"That's why it is sort of crypto-proprietary," Held said. "It's still proprietary in the sense of the brokerage is still going to push the distribution of [the funds], but instead of their name being on the outside, and it being obviously them, they are kind of hidden away a little as the sub-adviser."
Several partnerships have cropped up within the past year. Prudential Investments of Newark, N.J. has aligned with Alliance Capital of New York, MFS of Boston,
and SunAmerica of Los Angeles in the creation and management of funds. And OppenheimerFunds of New York has filed
a prospectus for Oppenheimer Select Managers, a fund of six funds offered by Prudential, Salomon Brothers of New York, Nationwide Financial of Columbus, Ohio and Merrill Lynch Asset Managment of New York.
John Hancock and Merrill Lynch jointly manage Hancock's new Growth Trends Fund, which was issued in September and attracted $270 million in assets in its first month, according to Hartstein. Since its introduction, the fund has been in the top three Hancock funds in terms of daily sales, he said.
The John Hancock Growth Trends Fund invests in three sectors - financial, health and technology. While Hancock had strong investment experience in the financial industry and technology, it was looking for a partner that could manage the fund's healthcare investments.
"We looked into the market place, and lo and behold, Merrill had a great track record," Hartstein said.
But, perhaps more intriguing to Hancock was the prospect of gaining access to Merrill's vast distribution network.
"I think the fact that they have a very credible track record made the decision very easy," said Hartstein. "But it didn't hurt that they have 14,000 [financial consultants] around the country either and they are perennially the number one distributors of mutual funds in the marketplace."
Hancock and Merrill agreed to use the brand name of Mercury Funds, which is owned and managed by Merrill Lynch, in the fund's prospectus because of concerns that the Merrill name would harm distribution through its other broker/dealer networks.
"[There was] sensitivity to our other broker/dealer distributors and having a product that shows the Merrill Lynch name being offered through Paine Webber or Prudential or A.G. Edwards," he said.
Currently, the fund is being distributed through the firm's other brokereage networks, including Paine Webber, Hartstein said. Although the other brokerages are aware that the Growth Trends fund is partially managed by a competing brokerage, they distribute the fund anyway, he said.
"It's a John Hancock product, which Merrill plays a role in sub-advising," he said. "There was some initial hesitation on the part of a couple of firms, [other brokerages] but once we showed them the track record Merrill has in the healthcare sector, 98 percent of our partners had no problem with it."
Even though brokerages are keenly aware that they are distributing products that are sub-advised by their competitors, they want other brokerages to be open to selling their own, comparable funds, Held said.
"I think that every broker/dealer with proprietary funds is looking for additional distribution opportunities," he said. "Merrill Lynch is trying to package their money management expertise through Mercury [Asset Management] and sell it through the independent broker/dealer market place ... that's a common goal today."
