Is the mutual fund industry under siege? Kurtosys Systems’ founder speaks to 5 key issues that keep coming up in conversations with marketing directors at asset management firms.
The easiest way of handling a difficult issue has always been to ignore it, cross your fingers and hope it will eventually evaporate away. At Kurtosys, we spend plenty of time talking to marketing executives at asset management firms. I believe the challenges that asset management marketers face may not go away anytime soon. In fact, I think the industry is at a real strategic crossroad and that the boards and leadership of the top 250 asset managers have much to consider in the near term. Failing to do so is making the life of their marketing directors more miserable each day.
As a specific product class, the mutual fund industry—irrespective of geographic nuances—is facing some tough challenges, none of which can be ignored. Five of these challenges warrant specific attention:
1. ETFs and closed-end products
The growth tells an undeniable story [chart]. In 10 years ETFs have made significant inroads in grabbing market share directly from Mutual Funds. Whilst there are technical arguments in the structural differences between Mutual Funds and ETFs, it would be remiss of any asset management firm to ignore the reality that has transpired. The customer wallet is being transferred from Mutual Funds to ETFs. These customers are the traditional longer term “savers” and ETF marketers have done a pretty fine job of attracting them.
2. Talent Retention
We are approaching the end of a generation of Investment Managers. The cynic in me would say that they have been well overpaid and most will retire pretty comfortably. Many others (think Woodford in the UK) are peeling away, and taking investors with them, to create boutique shops. CEOs of asset management firms must surely be worried here. Replacing this talent migration is going to be tough. And with a product class that is founded on trust, track record and “name recognition” this should be a particular area of boardroom debate.
3. Distribution Strategy
There are literally legions of salespeople at the big firms “selling” to wholesalers, advisors and bank distributors. But the days of the “relationship sell” are soon, if not already, over. Distributions models are changing because advisors are now required to demonstrate accountability. The customer (i.e. advisor) needs the mutual fund manufacturer to provide valuable product. Not just with performance. With transparency, accuracy and openness that mutual funds have traditionally not provided in a natural way. Firms have been slow to adopt technology to help facilitate more streamlined distribution and information flow. This had led to a relative “sameness” about mutual fund providers with little differentiation in offering.
4. Profit Margins & TER (Total Expense Ratio)
Expenses and costs of running mutual funds are not dropping quickly enough. It’s because executives have categorically failed to outsource their back and middle offices, let internal technology costs runaway with themselves and are carrying too many staff. Where the “job for life” paradigm is concerned, asset management is second only to insurance as the safe haven of global financial services. The problem is, as opposed to insurance, asset management has plenty more competing forces to deal with.
Our blog has talked about the advent of robo-advisors in recent times. This is truly a disruptive force against the mutual fund industry. Nutmeg in the UK, Wealthfront in the US are scaling, being noticed and getting the lion’s share of the Y generation—the real gold for the investment industry. Watching the asset management world react to this will be most interesting. The fact that most executives still “waft their hand” when you mention it tells you a story in itself. I did the same almost 15 years ago when Amazon first launched.
Technology (our favorite subject at Kurtosys) has a big part to play. But the real reason for the writing this blog stems from the consistency in what we hear when we speak to asset management marketers — they ultimately are tasked with growing the AUM base. The challenges they face are strategic and need to be addressed from the top.