Morningstar Advisor - October/November 2013 - (Page 49)

took place Aug. 20 and has been edited for clarity and length. Scott Burns: I would like to start off with getting some comments on the current state of fund distribution. How has distribution changed for you two over the years? Jim Jessee: Twenty years ago, the traditional broker-dealer firms were where you spent the bulk of your distribution efforts. But now because of the various platforms that are available, like a Placemark or the defined contribution marketplace, you see a much broader universe of potential clients. That presents some opportunities, but also some challenges in terms of figuring out where the main center of influence is going to be. It’s certainly a much more complicated landscape. Rich Dion: I think the distinction now is that distribution really just boils down to whether or not there’s a gatekeeper at the home office that’s making a selection. That changes the dynamic between the product providers and the independent advisor. John Rekenthaler: So that complication— going to want to have a very different type of conversation than the one you would traditionally have at the point of sale with a retail advisor. And then if you look at the DC marketplace the issues they want to discuss are different, too. It’s safe to say in general it’s a more informed, more institutional conversation. We go deeper into our investment process. this firm needs to find a way to talk to the people in charge of those portfolios and then get on to the portfolio system. That requires less support afterwards on the ground on a rep-by-rep basis. Is that a realistic assumption? a business-to-business model to more Jessee: I think so. You can bypass exactly what of a retail one or more individualized. Are you you just described. There are plenty of examples of companies that have done that and have had success. It’s certainly easier if you have a compelling investment story. If you can get to those selectors of asset managers you don’t necessarily have to go in and fight it out in the branches. finding that in the distribution model today? Dion: There’s no doubt about that. The way that relationships are being created today between a manager and a financial advisor is fundamentally different. The world was previously dominated by large captive systems. There’s a lot of infrastructure associated with that model, and that figured into the economics of the product and the price point at which it arrived at the advisor’s desk. You look at the RIA world today, and they operate in a fundamentally different economic environment than what an advisor at a wirehouse or a regional firm would be operating in. So, on every dimension, it’s fundamentally different. Jessee: It’s certainly a more institutional type audience to talk to about our capabilities than just the traditional broker-dealer community. The mutual fund vehicle, in particular, has a lot of application, particularly in the retirement space. So, there are more outlets today for a company such as MFS to potentially engage with. the development of platforms that have model portfolios that task is simplified. But Burns: It sounds like it’s moved from almost does that help or hurt? Jessee: It’s a positive. We’ve got a broader they had to assemble a large wholesale force and really put a mass effort into it. With of approach. Even in the wirehouse world, the better advisor groups you want to engage with typically have a formalized process of how they select managers and put them in their models. The heavy relationship that existed 20 years ago—it’s not that the relationship is now meaningless, but it’s not the be-all, end-all. It’s really just a way to get access to begin the discussion. Rekenthaler: Is it a matter of just finding out Dion: For a platform with static model portfolios, that would be correct. However, we are seeing more open platforms with more discretion on the part of the advisor. In such a situation, our experience is that providing operational access or accessibility to a product doesn’t constitute distribution. Getting on a platform doesn’t automatically translate into asset flows. You still need to find a way to connect with an individual decisionmaker. Usually in those cases it’s a financial advisor that is very protective of his or her time. You still need to establish some sort of a relationship with that individual. It’s that relationship that ultimately translates into distribution. Jessee: You’re right. If you’re just on the platform and the advisors are selecting from a broad menu and acting as portfolio managers, then you need to interact with the advisors. who the gatekeepers are and pitching Rekenthaler: I recently talked to a fund them the same way? Or are there sometimes analyst here at Morningstar. He mentioned he major differences in how they operate and had a conversation with a boutique manage- what they want to hear? ment firm, and the person said that they Jessee: There are pretty significant differences. marketplace. I think they had institutional or talked about is the representative As Rich was saying, when it’s a gatekeeper or a selector of asset managers that person is high-net-worth clients. They had never as portfolio manager, or “rep as PM.” Is that distributed to retail clients because they felt creating challenges? had never really sold into the financial advisor Rep as PM Burns: Another dynamic that I’ve heard MorningstarAdvisor.com 49 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013

Morningstar Advisor - October/November 2013
Contents
Contributors
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
Investment Briefs
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win

Morningstar Advisor - October/November 2013