Predictive analytics gives asset managers an edge in distribution
It's no secret that the asset management industry is facing unprecedented pressure. Firms' AUM continues to climb, but revenue and margins are slumping as fees plummet. The outlook for those margins is gloomy as shareholders, regulators and clients continue to pressure funds to deliver higher value at lower cost.
It's no exaggeration to say rock-bottom fees are an existential threat to many asset managers. However, technology could still save the day. Managers who leverages predictive analytics to optimize their distribution network, allowing them to connect quickly and efficiently with the armies of advisors who can sell their investment products, will gain a valuable edge.
Until recently, sales prospecting was mostly an analog game. Managers organized their wholesalers by region and channel, whether that was wirehouses, IBDs or banks. Save the odd trusty website and sprinkling of third-party data, wholesalers determined the best sales prospects the old-fashioned way: They used open source market intelligence, leveraged their existing networks and relied on their wits and extensive industry experience to seek out qualified prospects.
Managers have been aggressively competing for advisors' attention. The 50 largest mutual fund firms own 85% of all industry assets, which means small and medium-sized managers fight for the remaining market. They bombard advisors with communications: On average, an advisor receives over 10 messages per week from asset managers. A whopping 86% of asset managers say breaking through the noise and getting in through an advisor's door is their biggest challenge. If they manage, they will discover advisors' needs can include regular, pertinent updates on new and existing products, market commentary, education on investment concepts, or all three.
By slashing fees, custodians are also eliminating special ETF platforms they had spent the past five years building out.October 22
The move follows similar offers from other major brokerages in the last two weeks, as firms race to woo clients with the lowest-priced products possible.October 21
Most firms focus on the same cohort of advisors based on total AUM or purchases
based on a limited subset of available market data. This compounds the issue of competition, as most managers have identical top prospects, leaving the long tail of the market underserved. Some may even alienate advisors with irrelevant spam.
One thing is clear: The old approach — where asset management firms rely on a mix of patchy intelligence, street smarts and scattershot communication campaigns to connect with advisors - will no longer cut it. They risk a chunk of the distribution market if they don't arm themselves with predictive analytics software that churns out insights about advisors through data mining, machine learning and predictive modeling.
Predictive analytics feasts on mountains of data, which, fortunately, is not in short supply. Distributors are huge data generators just like everyone else. They are constantly producing data about investors, products, assets, transactions and their appetite for digital engagement. Everything, from the net worth of their typical client, to the last time they opened an email from a wholesaler, will be recorded and stored on a company database in the cloud.
Just like a pile of 1 million jigsaw pieces, any glut of raw, unorganized data is not particularly valuable. There's insight contained within the pieces, but they only reveal themselves when analyzed for similarities, and then arranged into meaningful patterns. Managers can use powerful computing to collect, analyze and organize the puzzle pieces if they know what picture they're making. In other words, data almost always has an answer, as long as they know their question.
For example, an asset manager might wish to know which distributors in a specific region of the U.S. have the greatest appetite for digital engagement. The firm may well discover it's sitting on a gold mine: millions of data points about how thousands of advisors have interacted with the hundreds of marketing emails sent out in recent years. It could train a machine learning model on that trove of historical data to identify who those advisors are, and what they have in common.
For instance, the model might discover advisors in a certain region with high-net-worth baby boomers are likely to open emails containing market updates, but will ignore information about new products, or vice-versa. Now that the model has learned the defining characteristics of the advisor who is most likely to read a certain type of content, it can apply the same algorithm to a giant population of candidates to identify and rank advisors by their appetite for engagement.
It's important to understand what makes analytics predictive.
The model is forensically analyzing past behavior to make informed judgments about future outcomes. Either way, these algorithms use sophisticated math to find the best prospects for asset managers, which allows for intensely focused sales strategies. Asset managers can pull in those leads to their CRM software and develop campaign lists. They can also distribute their content across multiple channels — whether digitally or in print — to ensure the right advisor receives the right message at the right time.
Being able to quickly identify the best prospects means wholesalers don't waste their time chasing advisors who are unlikely to sell an asset manager's products.
The head of RIA sales for a New York-based mutual fund said a predictive analytics platform reduced the number of sales meetings required to close the deal by 25%.
It's hard to deny asset management is in the doldrums, and that some firms will struggle to weather the disruptive digital age. Asset managers must seize any advantage to get ahead of the pack.
If they opt for technology that allows them to rapidly build the networks of advisors who are selling their products, it might be a decision that ensures not only survival, but renewed prosperity.