Convergence of the Asset Management industry highlights a need for marketers to educate not sell.
The newest gleam in the eyes of the asset management industry is liquid alternatives. According to a recent analysis by Goldman Sachs, retail liquid alternatives (RLAs) are in the early stages of a 5-10 year growth trend capable of generating up to 15% to 20% annual organic growth. Goldman Sachs believes this may translate into a $2 trillion AUM opportunity for the retail asset management industry.
As more and more emphasis is placed on the RLA space, ETF and mutual fund managers are seeing certain distribution channels for their products growing at a faster pace than others. Research by Money Management Executive shows that the RIA channel, independent channels and the direct channels are the distribution channels that managers are seeing their products being sold the most. As a result, managers are planning to increase their spend to these channels the most in 2014 with the hopes of continuing to effectively educate and market to them.
Expansion of RLAs
The proliferation of RLAs (which are primarily alternative strategies in '40 act funds) in the last few years has mainly been driven by three significant trends: the more general adoption of these strategies by retail investors; the packaging of these strategies and asset classes in mutual fund and ETF products and an emerging pivot from a relative return focus to absolute return benchmarks. As financial advisors and their clients adopt these strategies and incorporate them into their portfolios, the asset management industry has responded by offering an increasing number of new products from both traditional and hedge fund managers. The mutual fund and ETF vehicles can provide a number of benefits over traditional hedge fund strategies, including lower fees, more liquidity and greater transparency. The number of products have grown so quickly, however, that making sure your product stands out has become an industry-wide challenge.
New Product Complexity Shifts Focus for Sales and Marketing Professionals
The inherent complexity of many alternative strategies clearly points to the need for managers to educate advisors and clients. Complexity in retail products is not necessarily a bad thing; sophisticated investment strategies properly positioned in a portfolio can be very valuable in helping investors achieve their goals. However, if alternative assets are to play that role, it will require that investors have a comprehensive understanding that the range of risk, return and market correlations of these asset classes and strategies will vary greatly, and their appropriateness will be predicated on individual risk tolerance and investment objective. This is why the focus on education, as opposed to marketing or selling, is so critical in the liquid alternatives space. ETF and mutual fund executives must emphasize that education should be directed at both the financial advisor and investor audiences. Becoming an effective partner to financial advisors requires much more than showing good performance. Managers are responsible for ensuring advisors are in a position to clearly explain and discuss alternative strategies with their clients and demonstrate their value across the board. This means educating them on everything from the asset class to risk assessment and how their product(s) may fit into a client's portfolio. And it goes beyond just providing them with education, ETF and mutual fund managers will also need to offer the proper tools and collateral to convey this information efficiently and effectively to a client.
The Need to Educate Retail Investors on Both Risk and Reward
Traditional asset managers generally position their products in the context of how they have performed against their relative index and category peers, along with a discussion of their investment management philosophy. With liquid alternatives, fund managers need to take a step back. They first need to make the advisor understand the scenarios under which an asset class or strategy would be useful in a client's portfolio. Asset allocation education on how to incorporate alternative strategies into the portfolio is critical. Understanding how these products impact risk is vital to positioning them properly in a portfolio. Liquid alternatives - designed to produce strong risk adjusted returns - are highly dependent on the skill of the portfolio manager. Traditional long only mutual funds in the same category tend to show little performance dispersion whereas the dispersion is much greater with most alternative categories. The focus of the portfolio manager is on delivering outperformance, also referred to as "alpha". Therefore, providing context on the portfolio manager's view of the investing landscape, portfolio strategy and management process to an advisor is key to allowing the advisor to adequately evaluate each product and assess how to position it in a client's portfolio. Additionally, the manager must properly explain how the fund is expected to perform in various market conditions. Liquid alternatives can play a pivotal role in the average investor's portfolio, but only if the industry focuses on education first.
Ondina Purcell is director of marketing at Highland Capital Management.