Mutual fund marketers have maintained for decades that sales is a game of building trust through face-to-face meetings with clients. Put specialized wholesalers in front of different types of financial advisers, and sales are bound to rise. Divisions of labor within mutual fund marketing departments traditionally amounted to a game of divide and conquer in which some groups of wholesalers targeted wirehouse brokerage firms, while others tackled regional brokers, advisers domiciled at banks or insurance companies, independent advisers or accountants.

And not only have fund companies traditionally divided advisers along distribution channel, but also by assets under management. But both approaches fail to consider that institutions house vastly different types of practitioners and run the risk of failing to provide smaller firms or advisers with necessary tools for growth, according to a recent study.

The new thinking suggests that investment firms that sell mutual funds to advisers defined by professional habits and personal characteristics, rather than by distribution channel, may have success. Investment managers who segment their adviser customers along these lines and then tailor marketing messages to meet each group's needs are more likely to succeed, according to a new study published by kasina, a New York-based financial consultant, and @Risk, a Berwyn, Pa.-based data management specialist.

The main issues raised by the kasina/@Risk study are reminiscent of provocative themes in Moneyball, Michael Lewis's bestseller chronicling the Oakland Athletics' struggle to build a championship baseball team on a shoestring budget. Oakland General Manager Billy Beane accomplished this goal in 2002 by embracing unconventional metrics as a means of finding overlooked and undervalued players. Bean's methodology was founded on reinventing baseball statistics, with the help of advanced mathematicians who are also die-hard fans, for the express purpose of better understanding players' abilities.

In the mutual fund industry, data experts and consultants are also always pressing for new analytic approaches to predicting advisers' potential for growth. Based on interviews with 1,033 advisers, the study breaks out six new segmentation categories: rainmakers, advice-seekers, indiscriminates, order-takers, self-sufficients and mom-and-pops. Advice-seekers, the largest category in the survey, accounting for 39.3% of those interviewed, with 29.3% of all assets, typically welcome help building practices based on large numbers of accounts averaging only $85,000 per client.

Mom-and-pops, the next-largest segment, or 18% of those interviewed, typically position themselves as a one-stop financial service shop for their clients and limit involvement with mutual funds to several trusted companies. Self-sufficients, 17% of those interviewed, are not interested in wholesaler support but rely, instead, on performance, portfolio management and fee structures in making their fund selections.

Order-takers, 13% of those interviewed, serve a very large number of clients (448 on average) but these accounts have very low average assets. They demonstrate no particular brand loyalty and sell whatever they can. Indiscriminants, 11% of the survey population, have the lowest average client size of any segment and have no set criteria for making investment decisions.

Finally, rainmakers, the big kahunas, a mere 1.6% of those surveyed, serve an older population with 10 times the average account size. Their average customer is 58, versus the industry's average of 52, and are located in urban areas.

Within distribution channels, however, these six segments are found in almost equal proportion, the survey found. For example, advice-seekers and mom-and-pops are the most prevalent segmentation types in each of traditional distribution channels.

In addition to proposing new ideas aimed at altering archetypal sales practices of the $7 trillion mutual fund industry, the study also ignites a cultural war between battle-tested veterans of hard-nosed investment sales and computer-savvy marketers who believe that changing times demand new tactics. The study examines the limitations of conventional mutual fund marketing and proposes an alternative method based on systematic attempts to categorize advisers' professional traits.

Advanced Knowledge

So, how can fund companies target these six groups? By obtaining advanced knowledge of individual customers, according to the study's authors. "The self-sufficients don't want a wholesaler calling them and won't look at marketing materials," said Lee Kowarski, a consultant at kasina. "Their focus is on portfolio management, performance and fees when it comes to making a decision." However, since advice-seekers are very open to receiving wholesaler support, these are the types of advisers fund companies should pursue.

Building adviser segmentation profiles is easier than many firms think, according to Patrick Baldasare, president and CEO of @Risk. The process involves taking advisers' trading records and using that information to predict answers to the survey's questions. Profile-based segmentation is an opportunity for the mutual fund industry to catch up with other businesses that have employed similar approaches to improve target marketing, Baldasare said. One @Risk client increased productivity among second- and third-tier adviser clients by an average 35% by using individualized segmentation, he said. Although individualized segmentation hovers at 80% accuracy, the current alternative is far less productive, he said. "When you do things in a disciplined manner you have a better chance of being correct," Baldasare said. "The world of marketing is all about anticipating consumer demand."

But not everyone is convinced. Conventional thinkers like Steve Ferrone, senior managing director at ABN AMRO Asset Management, which oversees $60 billion of assets in the United States, believes in proven segmentation methods and says technology is a poor substitute for human interaction. Experienced wholesalers, not computer-generated profiles, are still the best arbiters of advisers' demands, Ferrone said.

"Any given day, I'll take needs-driven salespeople over profiles or databases," he said. "I need better lists. I don't need the profiles. Profiling is just a starting place, and it doesn't do any good qualifying someone we want to call," Ferrone said.

But moderates in this debate concede that new segmentation categories may help fund companies better anticipate advisers' needs but express concern over losing business to technical shortcomings in newly implemented systems. David Rieben, director of internal sales at Calvert Investments, cautions that blind spots in data-mining technology, such as omnibus accounts that mask individual brokers' trading records, may skew an adviser's profile and subsequently cause a mutual fund provider to take the wrong approach. He also views the goal of compiling profiles for thousands of customers as a Herculean task. "In theory, it's a great idea, [but] getting somebody to enter information in a [cost-effective] way is going to be the challenge," he said. Calvert employs @Risk's data-mining services.

Franklin Templeton Investments also falls somewhere in the middle of the debate by relying on traditional distribution channels as the bulwark of its segmentation strategy. But at the same time, the firm does use limited profiling strategies for refined target marketing exercises. "While we haven't announced any changes to this structure, we are constantly reevaluating our approach to ensure that we are providing the best possible service to our advisers. Certainly, the ideas presented by kasina are of interest," said Matt Walsh, a Franklin spokesman.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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