RIAs with DC assets are in demand by fund companies

Registered investment advisors (RIAs), if you control significant defined contribution (DC) assets, then mutual fund companies are hungry for your business and will do whatever they can to accommodate you. That's the message I took away from "The 2010 Distribution Landscape," at panel at the NICSA East Coast Conference on Jan. 14. The panel, which was moderated by Matthew Bienfang of TowerGroup, included Catherine Saunders of Putnam Investments, Daniel Steele of BNY Mellon Asset Management/Dreyfus Investments, and Bill Taylor of Pioneer Investments.

DC plan assets offer mutual funds very attractive profit margins and RIAs are a significant source of growth in this arena, according to Bienfang. For example, defined contribution investment-only margins average 25% vs. about 17% for retail and 15% for SMA (separately managed account) assets. 

Bienfang stressed that fund firms need to sell to RIAs as if they were institutions rather than individual investors. Fund firms must also ask RIAs how they can help them grow and manage their businesses. Then Bienfang asked his panelists to talk about how they're targeting RIAs with DC assets.

BNY Mellon: Game changer is coming 
Once IRS Form 5500 requires the disclosure of advisor compensation for retirement plans, "This will be a game changer," said BNY Mellon's Steele. Advisors won't be able to pick up business simply "by golfing with the CEO's brother," he said. Instead, the business will shift to specialists. As a result, his firm is seeking wholesalers with a technical background investment management and retirement. "Ideally you want both, but those people are rare," he said.

Steele also mentioned that his firm is using collective trusts, which are an institutional, less expensive way to offer the same investment strategies available in the form of mutual funds. Collective trusts are even less expensive than ETFs. Of course, as I recall, they also lack some of the transparency of mutual funds. For example, their net asset values aren't published by newspapers. 

Pioneer Investments: Open architecture is key 
Bill Taylor said the spread of open architecture in DC plans is helping fund firms such as Pioneer. He is adding portfolio consultants who can interact with gatekeepers about portfolio dynamics and how the firm's funds fit in portfolios. 

Taylor also stressed follow-up. He said that many RIAs have complained about salespeople who'll take them to dinner, but won't send the materials they promise. It's a cultural challenge for salespeople that customer relationship management systems alone aren't enough to solve. 

Putnam Investments: Give RIAs what they want 
Cathy Saunders said she has learned that it's important to call on RIAs the way they want to be called on. Communication via webinar and phone call can be just as effective as face-to-face, if that's what RIAs want.

Saunders has found that many RIAs want to dig deep into the firm's thought leadership and market outlook. They have a strong appetite to bridge the knowledge gap, she said. In addition, advisors from wirehouses are looking for business management tools and they want companies to support the tools they're accustomed to using. 

Implications for fund firms

• Fund fees will fall because of increased competition, as Taylor noted.
  
• It's important to segment RIAs. About 15% of RIA firms control 80% of the assets and 30% of the RIA channel is in the Northeast Corridor of the U.S., from Washington, D.C. on up, said Saunders.
• Target date funds (TDF), the most popular DC plan option, remain a barrier to entry for fund firms because 92% of TDFs are proprietary funds of recordkeepers. However, Taylor believes the open architecture will chip away at the dominance of proprietary TDFs. Steele said that in 2010 non-proprietary funds will finally surpass proprietary funds in DC plans.
  
• Providing incentives to sales people is difficult because of DC plans' omnibus accounting, as Taylor and Steele noted. However, the situation is improves once a firm becomes a "premier provider," Taylor said. He also noted that it's important to get retail and retirement wholesalers to cooperate. Sometimes retail wholesalers want the retirement wholesalers to help the retail wholesalers' RIAs to sell to DC plans when the retirement wholesalers are aware of other RIAs who are much better suited to DC sales.
  

Implications for advisors

• You'll find more actively managed funds available for lower fees.
  
• Fund firms will take a more consultative approach to their interactions with you. Saunders said she has learned that it's important to understand RIAs' business models before deploying resources.
  

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Susan B. Weiner, CFA
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Copyright 2010 by Susan B. Weiner All rights reserved