The broker/dealer distribution channel has become increasingly competitive among mutual fund firms, driving the need and importance for fund wholesalers, according to a new report published by Cerulli Associates of Boston.
In 1990, there were 34 mutual fund companies competing within the broker/dealer distribution channel. That number has jumped to 150 firms, according to the Cerulli study. In terms of distribution, broker/dealer firms account for 44% of all mutual fund assets. The direct market channel accounts for 29% of assets, but is a shrinking segment as investors look to platforms that offer advice and guidance, according to Cerulli.
Not surprisingly, the number of wholesalers is almost twice what it was five years ago, now at more than 4,500. While the number of registered reps has grown 77% in the last five years, the number of wholesalers that cater to them has grown at a faster pace over the same time period, according to Cerulli. Firms are also increasing their wholesaler effort in nontraditional intermediary channels, such as 401(k)s, wrap programs, and registered investment advisors.
As fund companies expand their distribution efforts, load and no-load firms sales efforts have begun to overlap, according to the study. Broker-sold firms are now offering their funds to RIAs through supermarkets. Direct-marketed firms are tapping the 401(k) and wrap markets, and have even begun adding load share classes to bring in commissioned sales. According to Cerulli estimates, 64% of direct-marketed mutual fund firms net flows in 2000 were attributed to financial service intermediaries.
"This cross-pollination of distribution channels is both increasing the cost of distribution and the commoditization of asset management by flooding all channels with product," according to Cerulli.
The effects of the increased distribution costs may lead to higher mutual fund expenses as well as an increased need for companies to merge in order to remain competitive, according to Cerulli. "The rapid increase in distribution expenses experienced by fund companies may inflate mutual fund expenses, as shareholders are asked to bar the costs of directed brokerage revenue sharing, larger sales forces, and expensive marketing campaigns."
Still, many small- and mid-tier firms will need to merge with other firms in order to bear the costs of distribution and remain competitive.
The study, entitled "Wholesaling: Trends in Intermediary Distribution," is based on interviews with mutual fund sales executives, strategy directors, key account managers, wholesalers, and distribution managers from both broker-sold and direct-marketed firms. Cerulli also interviewed analysts at broker/dealer firms, defined contribution record-keeping firms, fund supermarkets wrap sponsors, and individual financial advisors.