Morningstar Advisor - October/November 2013 - (Page 40)

Spotlight Winning the Distribution Battle By John Rekenthaler The path to sales success: institutional excellence. A quarter century ago, the mutual fund business was like the soda business. Just as one soft drink tasted pretty much like another, so too did one mutual fund look like another. The product was important insofar as it needed to be of acceptable quality, so that the customer wouldn’t reject it. The real key for success was distribution. The companies that would win in the marketplace would be those that could best push their products. A look at the 12 largest fund companies in 1986, by assets under management, tells this story. Merrill Lynch Fidelity Federated Dreyfus Franklin Dean Witter Kemper Putnam Pru-Bache E.F. Hutton Shearson IDS 40 Morningstar Advisor October/November 2013 That was some distribution muscle alright. Five of the 12 companies were wirehouse brokerage firms with giant captive advisor forces, even though wirehouse firms as a whole were only a small fraction of the mutual-fund industry. A sixth, IDS, had an even more powerful sales model: IDS’ advisors were restricted to using IDS funds and only IDS funds. Kemper, Federated, Franklin, and Putnam each had armies of wholesalers, in addition to certain market advantages. (For example, Federated was well established with the banks, and Franklin dominated the muni-fund marketplace.) Fidelity’s and Dreyfus’ advertising and extensive favorable media coverage made them household brand names. Their strong brands enabled them to thrive with direct marketing. There were three major distribution channels back then: proprietary funds with captive advisors; nonproprietary funds that were sold through wirehouses, smaller brokerdealers, and independent advisors; and no-load funds that investors bought directly. Each channel marketed itself differently. Proprietary fund companies rode the coattails of their powerful national brands. Buying Merrill Lynch, or Pru-Bache, or E.F. Hutton funds meant buying the bull, the rock, and the man who silences a room the moment that he starts to speak. Nonproprietary funds highlighted their independence, suggesting that proprietary funds were run by marketing departments rather than by the investment management group. For their part, direct funds partnered with the financial press to advocate the merits of no-load, do-it-yourself investing. The arguments were often heated. Morningstar ran two versions of its annual mutual fund conference, the Morningstar Load-Fund Conference and the Morningstar No-Load Fund Conference, because the two groups could not co-exist. Load-fund advocates, armed with consultants’ studies, talked about how poorly direct investors timed their no-load purchases. Sometimes, they also argued that load funds had better total returns as well. In response, no-load funds (again assisted by the media) portrayed financial advice as being costly and biased. The financial advisor was an unnecessary dinosaur; the world was going no-load. These debates gave the impression that the choice of distribution channel was critical for a fund company. Whichever of the three channels that it selected, the company would cut off large segments of the buying populace. Worse, it might make a bad choice and find itself on the wrong side of history. For example, what if the investment landscape became bifurcated, with investors seeking assistance

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

Morningstar Advisor - October/November 2013
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