An investment manager launching funds today faces a much different distribution dynamic than fifteen years ago, or even five, for that matter. Driving this change is a multitude of factors. The dominance of fund supermarkets and trading platforms, powerful new technologies, increasing demands by investors for transparency, ever rising costs and extreme product proliferation have combined to massively alter the competitive landscape, forcing all managers to rethink the distribution process altogether.
No area of asset management distribution has been immune to change. In particular, sales and wholesaling methods have been heavily impacted. With increasing cost pressures, growing time constraints and the splintering of target markets, very few new fund companies can afford or may even want to build traditional national wholesaling teams. And joining the old approaches, new methods have emerged – dedicated internal sales teams and hybrid models. The newest approach, virtual wholesaling, resides in The Cloud, heavily leveraging robust new technologies.
Choosing which methodology, or blend, best fits the manager launching into formal distribution is a complex undertaking with potentially large financial consequences. Make no mistake, regardless of the path chosen, there will be costs. Each manager should consider their individual needs, product complexity, available resources, distribution channels and other factors when building out the right wholesaling approach to raise assets.
To help shed some light on sales strategy development for managers launching new funds, outlined below are the general characteristics of different wholesaling models as well as some other factors to consider.
Understanding the Options
The traditional wholesaling model, with teams of dedicated external salespeople supported by internal partners, is on the fade and most likely heading for extinction in the years ahead. Far from ineffective, this classic wholesaling method is simply very expensive. And in a world where cost is king, any method invented in the 1960s should be under scrutiny. It is estimated that when the “all in” costs of a traditional team are tallied, every meeting in the field actually costs the fund firm nearly $1,000, regardless of whether or not a sale is made. Yet traditional team wholesaling remains the model of choice for large national brands selling mutual fund and variable annuity products through the few remaining legacy wirehouses. Old habits often die hard.
Today, the breadth of methods available to asset managers along the wholesaling spectrum include:
Traditional Wholesaling
This model is deployed by an outside sales force that spends the majority of its time “on the road” meeting with prospects and clients on a regular basis. While the model is expensive, it allows for high touch, personal interaction and deeper dialogue. The high cost nature of this method makes it imperative that the wholesaler provide true value, offering detailed product data, practice management tips and highlighting emerging industry trends. What strategies are other successful advisers in the area deploying to grow and manage their businesses? A wholesaler providing real value should know and be able to share stories of success. This elevated demand is forcing today’s sales professional to evolve from relationship builder to technical expert. It’s not uncommon for today’s externals to hold advanced designations and have deep technical expertise that allows them to explain product nuances clearly and interact with advisers at the portfolio management level. Evolution continues.
A new breed of technical sales expert has joined the fray. Client Portfolio Specialists are increasingly being added at those firms with the budget capacity. These quasi-portfolio managers typically carry a CFA designation and are prepared for the “deep dive” with the adviser who demands a discussion about detailed portfolio characteristics. They join the traditional external wholesaler in the field as required by more sophisticated advisers. It’s fairly clear that a successful wirehouse team requiring the support of a traditional wholesaling model, plus a Client Portfolio Specialist, is the highest cost wholesaling strategy of all. However, does this channel present the greatest asset raising opportunity, making the larger investment worthwhile? Perhaps. But consider, while wirehouses control the largest share of invested assets today, other channels have higher growth trajectories.
Hybrid Wholesaling
In this model the sales team takes on characteristics of both an internal and external sales force. They work from an office location for a portion of their time but will travel to capitalize on success in a concentrated geographic area, with a particular product line or to follow up on larger opportunities. According to a recent industry study by consulting firm Kasina, more than half of asset management firms utilize some kind of hybrid model. This model is less expensive than a full external sales team approach, allowing firms to be more opportunistic and strategic about face-to-face interaction with prospects. It is also most typically deployed in less target rich regions that cannot justify a full-time external effort.
Internal Only
Growing in popularity, this sales model is driven by a team typically housed on-site at the fund company, in a remote location or some combination of the two. According to a study by financial publisher Ignites, mutual fund companies expanded internal sales people by nearly seven percent in 2013. The growing adoption of internal teams is driven by two forces. First, costs for travel and entertainment continue to spiral higher. A typical travel and entertainment budget for an external wholesaler in a normal territory runs between $60,000 and $80,000 annually. Second, more and more, independents and RIAs do not desire a heavy dose of face-to-face meetings. The adviser’s time constraints and the wide availability of product information instantly through electronic venues means that, increasingly, the old fashioned territory rotation best practice is breaking down. Successful independents and sophisticated RIAs would rather gather current data from electronic sources and make a phone call for more detailed information. Pre-Internet, the fund or variable annuity wholesaler with fact sheets and bagels every few weeks was a welcome sight. Not so much anymore.
Virtual Wholesaling
Purely an electronic method of sales outreach, it utilizes a firm’s website as home base for all content including white papers, fact sheets, market insights, manager profiles, media coverage, performance achievements and competitive comparisons. Compliant content can then be shared through email (one-to-one or in campaigns) and through social media. Leads are tracked and followed up on by a member of the sales team. The CRM becomes the desktop, the center of command and control and the more savvy sales groups deploy the website as a presentation tool using instant screen sharing technology. Virtual wholesaling is widely regarded as a less expensive, scalable and more efficient way to reach a wide audience. It is also highly quantifiable. Website integration within the firm’s CRM provides robust analytics. One challenge with virtual methods is that internal sales staff will need to become comfortable and proficient with the tools and technology required to operate in a virtual world. Another factor is the extent to which the audience requires face-to-face interaction, a particular challenge with wirehouse selling.
Key Accounts
In a world of plaftormization, especially in the wirehouse and independent channels, a dedicated professional salesperson that focuses on platform product placement is crucial. When working to build a presence here, a key accounts person is a basic requirement. They engage with the distributor’s research members to ensure product review and secure approval. And it’s not enough to just gain shelf space. You will have plenty of company. The need for elevated status to raise your product’s profile among hundreds of competitors is critical if you wish to compete in a meaningful way. Following base-level positioning, there are approved lists, and then the revered preferred lists. Navigating up this food chain typically takes outsized performance as well as a variety of supporting promotional partnerships with the intermediary. These costs need to be a line item in your distribution budget.
Big Data & Profitability
Big data is the new big thing. Billions of devices now produce trillions of records weekly on a global scale. The breadth and depth of this data is growing at a breathtaking pace and measured (at the moment) in terabits. How to capture, curate, manage and analyze all this data has mushroomed into a multibillion-dollar industry. In just the past few years, businesses’ ability to measure and assess the most important data point for any revenue producing entity, profitability, in real time, is but a piece of software or a mobile app away. Given the tools and information made readily available by powerful CRMs, a key accounts manager should be able to quickly gauge the profitability of any channel or client he or she distributes through and answer the key questions the firm’s leadership desires. What are my costs of sales for RIAs versus independents versus wirehouses? Are my profit margins greater for RIAs or independents? How long a sales ramp will be required to profitably enter the institutional space? What is my break-even in AUM by product and territory in the RIA channel? Which independent broker-dealers produce the best gross margins?
Powerful analytics are also available to assess different wholesaling models. A wholesaling team is an operating business. It has revenues and expenses. So why doesn’t accounting huddle with IT and produce a monthly P&L for each sales entity? They should. Sales leadership can then inform the firm’s senior management about which wholesaling model is not only producing the highest gross sales, but which one is the most productive, the most profitable. Better distribution strategy will result. What is the exact cost structure of each wholesaling model? Which geographic regions offer a lower cost of sales. Are some territories characterized by a mix of higher margin products than others? Why? Are some teams highly profitable and others struggling in the red? Why? Big data and profitability analytics can provide the answers. These vital questions and informed answers (not hunches) are foundational to effective strategic product and distribution decisions.
Putting the Options into Practice
Once a manager has a firm grip on the wholesaling options available they can review several key factors to determine which model(s) will be most effective to help them raise assets in the most cost-efficient way. How the fund(s) got started and the target audience are two key considerations. These factors will guide marketing in developing the stories the sales staff will tell to engage and enthuse the adviser. The fund’s genesis plays into the target market and the distribution approach as well. For instance, if a firm builds a mutual fund to complement SMAs at the wirehouses, a virtual approach likely won’t be very effective. That said, a manager launching a liquid alternative product without a retail track record and targeting institutions may be better served by beginning with a virtual model rather than having a high cost institutional sales team working the phones all day.
In fact, a virtual model is likely the best way to start for any manager, alternative or not, targeting RIAs and independents who don’t have an existing distribution footprint. When it comes to efficiency and reach, a virtual model is the great equalizer. And in today’s cost constrained world it is gaining more favor as the distribution starting point for many mangers launching new funds. The only exception is when targeting the wirehouse channel. Due to their heavy reliance on legacy technology, layers of compliance and restrictive communications policies, digital outreach in this arena is very cumbersome at best. Rather than a core sales approach, virtual outreach for the wirehouse should be considered only to augment traditional methods.
3rd party distributors are also an option as fund managers look to manage costs but still achieve many of the benefits of a proprietary traditional sales force. Some firms look to leverage a 3rd party solution when they begin to see success in a concentrated area. It’s important to understand, however, that 3rd party firms aren’t always on the hunt for new product. Many of the strongest are not adding new strategies so as to avoid product cannibalization in a region or market segment. Also consider how many product “stories” a wholesaler has time to share in a thirty-minute meeting. Most advisers’ bandwidth can realistically process between one and three. The fund manager must consider how much “play” his or her product is going to get among the 3rd party firm’s full suite of product offerings. There are firms, however, that will take on just about any fledgling fund. Savvy fund management should wonder why. In the end, there are rarely guarantees of sales success with this approach, a risk fund managers must be aware of when considering an engagement with a 3rd party firm.
Tools and Technology to Support the Team
No matter what model or combination of models a manager chooses to drive fund sales, there is still the need for and cost of the tools and technology to support the team. Whether that’s producing compelling, high value content to support virtual outreach or a tablet technology that virtualizes the “wholesaler’s bag,” a manager must be prepared to invest. It takes resources, human and financial. Most critical of all is the need to leverage technology to actually measure which sales channels or partners are successful. A fully integrated CRM system must be populated with relevant client profile data and capture all daily activity. Further, a sales reporting engine will ultimately be needed to provide consolidated management reporting and identify sales at the account and adviser level to measure team effectiveness. CRM and ancillary analytical tools won’t care for themselves. The staff support structure around the sales apparatus can make or break a fund’s distribution efforts. There are many firms today with neglected CRMs and dirty databases that squander a team’s selling time by diluting their efforts through unproductive “work arounds” and data hygiene.
The Upside of Change
There’s no question that the distribution landscape continues to evolve and fund managers are being forced to adapt and adopt new wholesaling options to succeed in what has become an ultra competitive arena. The information above is a starting point to help understand today’s distribution landscape, the new dynamics altering it and approaches to catalyze wholesaling success. Perhaps most important of all, fund leadership must understand these options in the context of their product offering, intermediary demands and available distribution resources. Change is challenging but it also creates opportunities for growth if managed in the right way. Smart strategy is a minimum standard to compete and win in today’s increasingly competitive fund distribution world.
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