ETF and mutual fund providers need to rethink their sales and marketing strategies in light of the rapid growth in the sales of these products by registered investment advisors. RIAs have overtaken the top four wirehouses [Merrill, Wells Fargo, Morgan Stanley and UBS] in sales of ETFs and long-term mutual funds, according to Access Data, a Broadridge company. This complicates sales and marketing efforts since RIAs tend to be smaller and have diverse business strategies - ranging from single-person operations to large teams.
The asset numbers for long term mutual funds and ETFs over the last two years highlight some key differences between the two channels. The RIA channel for mutual funds and ETFs was $1.67 trillion at the end of the first quarter of 2014, surpassing the total gathered by wirehouses. During 2012 and 2013, the RIA channel grew slightly faster than the wirehouses in absolute terms, with total assets increasing by $328 billion, compared with wirehouse growth of $322 billion. This accelerated in the first quarter of 2014 with assets for the RIA channel increasing by $68 billion, versus an increase of $38 billion for the wirehouse channel.
While the growth rates of both channels are roughly similar - around 25% over the two-year period - the drivers of growth are markedly different. Over the same period, the RIA channel has grown more evenly between long-term mutual funds, which represent 59% of new assets, and ETFs, which represent 41% of new assets. The wirehouse channel, on the other hand, saw most of its increased assets from long-term mutual funds, which represent 73% of new assets.
The four main wirehouses offer a central point of contact for around 57,000 advisers, while the RIA channel is more diverse with the same number of advisors spread among 14,000 RIA firms. To find the right targets among RIAs, it is important to segment RIAs by size and then determine how many firms and what percentage of the total assets reside in each segment. For example, small RIAs with less than $100 million in assets under advisement represent about 50% of all RIA firms. Medium-sized RIAs, with $100 million to $1 billion, represent 36% of all RIA firms.
At first glance, it might appear that small practices are a good target, when in fact they only represent 14% of the RIA channel's total assets. This affects ETF and mutual fund providers' distribution options - for example, visiting each RIA in person could be prohibitively expensive; a telemarketing operation could be a better approach.
The medium-sized RIA segment, by contrast, has a high usage of mutual funds (33%) and ETFs (19%), and represents the largest percentage of overall RIA assets (38%). Medium-sized RIAs also represent the largest upside for growth in terms of overall asset opportunity (i.e. assets not yet invested in mutual funds or ETFs).
After fund and ETF providers identify the most attractive segment of the RIA channel, they need to consider three questions as they build their sales and marketing plans. First, how RIAs will learn about and access their products. The key to this is to understand the relationships between RIAs and their custodians. Custodians offer RIAs a range of essential services, which has boosted the growth of the channel over the last few years. In some cases the type of business the RIA conducts may drive the selection of a custodian, which is useful to know when determining which custodians to target.
Second, ETF and fund providers should determine the type of business conducted by the RIAs so they can offer appropriate products. For example, they should understand the type of accounts the RIAs manage, whether these are discretionary or non-discretionary, whether they use actively managed products, and what types of products (ETFs, funds, etc.) they prefer.
Third, providers need to align their sales and marketing resources with the size of the opportunity. Determining the appropriate size for a territorial sales team, spreading the best opportunities evenly among the sales teams, and setting realistic targets based on the size and characteristics of the target segment will help to ensure that resources are allocated in a way that maximizes profitability. Sales managers can also get a true measure of how sales are progressing by analyzing their sales teams' success by territory and market segment versus the mutual fund and ETF market overall. They can also get a better picture of growth by product type across the different regions.
These considerations will be increasingly important in coming years if, as it appears likely, the RIA sales channel continues to outpace the wirehouse rate of growth. Fund and ETF distribution strategists will have a harder time analyzing and reaching the RIA community than they do pitching to a handful of wirehouses today. But given the growth trends in fund and ETF assets, it will be worth the effort.
Frank Polefrone is senior vice president of Access Data, a Broadridge Financial Solutions company.