BOSTON - Funds must develop innovative sales strategies through new channels if they want to counter rising costs and increased competition in fund supermarkets, according to industry executives.
"Competition for assets is intensifying," said A. Peter Cieszko, Jr., managing director of national distribution for Nuveen Managed Assets of Radnor, Pa. "There are low barriers for entry into supermarkets but high barriers to success. Costs are escalating while fees are dropping." Cieszko spoke at a conference on mutual fund supermarkets here last week, sponsored by the Institute for International Research of New York.
Competition from other funds and investment products has sapped asset growth in supermarkets in recent years, Ciezko said. Strong financial markets have dampened mutual funds' appeal with investors who are more interested in brokerage and separate accounts, he said.
Seventy percent of the growth in supermarkets since 1994 has been the result of market appreciation, according to Financial Research Corporation of Boston. Supermarket net sales peaked at $210 billion in 1997, but have slumped in the last two years, when sales were approximately $105 billion annually.
Costs associated with selling through supermarkets are rising. Direct sales to supermarkets need to be supported with marketing and branding campaigns that will cost at least $10 million to $15 million, according to T. Neil Bathon, president of FRC. A more viable approach is selling through financial advisors, brokers and wirehouses, but that requires marketing and sales efforts in addition to sales fees, he said.
How a fund is priced can have a large impact on how well the fund sells in the supermarket, said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I., a mutual fund consulting firm.
"To get the pricing right, the adviser needs to assess the type of sales and marketing infrastructure that is necessary to support, maintain and grow the business," he said.
By issuing a new class of shares or launching a new fund family that mirrors existing funds, advisory, 12b-1, service, shareholder and advisory fees can all be used to recoup supermarket distribution costs, he said. Also, fund complexes need to consider who distributes their funds in supermarkets, Bathon said. Currently, the three primary methods of distributing from supermarkets are direct, through financial advisors and through 401(k) plans, he said. Investor's desire for advice and growing retirement assets make selling supermarket funds through financial advisors and 401(k) plans the most viable options for most funds, Bathon said.
When marketing to advisors, funds need to differentiate themselves from other funds by customizing their sales approaches to match each advisors' particular market, he said.
"They don't want golf balls and they don't want to see you," he said. "You really need a targeted, customized approach with them. You need to design materials and pricing to their exact needs. ... Send a portfolio manager. They want to know how you manage your funds. They don't want a sales pitch or anything that's like a pitch."
While it requires a longer sales cycle to crack the advisor channel than to sell directly through supermarkets, supermarket funds that are sold by an advisor benefit from more client loyalty resulting in less turnover, he said.
A similar approach to that of selling through advisors can be taken with 401(k) programs which could potentially attract even more assets than selling directly or through advisors, Bathon said. Plan sponsors evaluate funds for service quality, fees, reputation and education or advise provided.
Funds can target the market by developing relationships with 401(k) alliances, keeping fees around 35 basis points and forming partnerships with on-line advice providers, Bathon said.
While competitive pressures have made it more expensive to compete in fund supermarkets, selling through supermarkets is still worth the expense, Bobroff said.