A hard working website can be the next best thing to a wholesaler for small mutual fund companies.

For years, mutual funds have traditionally been sold to registered investment advisers (RIAs), financial advisors and planners through a national sales force comprised of individual wholesalers. These wholesalers were either employed directly by a fund company or worked independently to represent a variety of funds, often in a specific geographical area.

But the prohibitive costs of starting a national wholesaler network, combined with changes in the RIA business has made it more difficult for smaller fund companies to even consider starting and maintaining any type of national sales force.  The challenge and uncertainty of these significant start-up costs has largely excluded hundreds of small mutual fund companies, which have exemplary performance records, interesting investment strategies and talented personnel, from gaining a national human sales presence.  This presents a disservice to RIAs looking for funds with solid track records and fresh strategies, and ultimately a disservice to end investors.

Since the 2008 financial market meltdown, “the ‘good old days’ of traditional mutual fund distribution” have quickly been coming to an end, according to Frank Polefrone, senior vice president of Access Data (http://www.mmexecutive.com/issues/2009_5/189740-1.html). “With assets bleeding and profit margins squeezed, mutual fund sales managers are now faced with budget constraints that make it virtually impossible to sustain the expensive distribution model of the past.”

In his article*, Polefrone noted that while fund distribut

ors are working to cut their distribution costs, “the ground beneath the traditional distribution channels is shifting. The most powerful distributors of mutual funds have either been acquired or absorbed into a handful of large broker/dealers and banks. Even if a wire house broker/dealer has remained intact, many top producers with established accounts are moving to competing wire houses, or leaving to form their own independent advisory business with an independent B/D or custodian supporting RIAs.”

A 2011 study by Tiburon Strategic Advisors found that the independent advisor channel has grown significantly and faster than any other channel, including institutional.  Fee-only financial advisors (RIAs) have grown at 18% per year for the past 12 years.  Independent reps are now growing faster than any other distribution channel and now control about 32% of th

e market and manage about $1 trillion, according to Tiburon CEO Chip Roame.

Limitations of the National Wholesaler Model

Selling mutual funds using a national wholesaler network is not only expensive, but it is increasingly becoming more ineffective.  The reason is that RIAs, planners and brokers often have more detailed access to any fund company’s component fund data before any fund company’s wholesaler even enters their office.  Devoting time to meeting with wholesalers is often considered redundant unless the wholesaler has some powerful investment or market insights which are not evident from the data.

Unfortunately, many RIAs say this is rare.  It may

also explain why many wholesaler meetings often last about 30 minutes or less.  To gain more face-time with RIAs, fund wholesalers have resorted to hosting espresso carts in RIA offices, along with the traditional approach of offering meals, outings to sporting events, wine tastings and presentations.

This is an expensive way to sell mutual funds, but it only tells part of the story. National mutual fund companies’ sales forces are comprised of a formalized system of national and regional managers, supplemented by internal desk-bound wholesalers, all of whom are buttressed by sales support personnel, including key account and project managers.  One fund exec

utive estimated that it cost his company $1 million annually in salary, bonuses and expense reimbursements to keep a large-fund company wholesaler on the road in the Northeast U.S.  This expense is prohibitive to most small fund companies.

It also will become more expensive as the trend continues towards more advisers going independent.  This will mean more dispersed office visits, often with fewer registered reps at a single office.

Enter the Hybrid or Virtual Wholesaler

With the steady industry trend of more advisers going independent, accompanied by rising travel and entertainment expenses, more fund companies have raised questions about the viability of maintaining their traditional fund company’ national wholesaler sales force.  This has not gone unnoticed by some in the fund industry who have advocated for hybrid or virtual wholesalers.

Due to technology and the changing needs of the advisers, there will be fewer external wholesalers on the road, and those that are out there will not be making as much money as they did in the past. This will change the wholesaler ranks, consultants say.

Wholesalers will need more sophisticated skill sets. The job will become more technical.  Wholesalers will have to not only become good relationship managers but well versed in portfolio management.  This may require that fund companies hire wholesalers that have a CFA designation or other credentials to show they know various investment processes.

According to a June 2011 study, “Excellence in Distribution: Hybrid Wholesaling,” by Kasina, an asset management consulting firm, mutual fund companies with wholesaler sales forces that do not use hybrid wholesalers “miss a critical opportunity to pursue additional business opportunities affordably and profitably.”

The Kasina study found that hybrid wholesalers were “knowledgeable about products and competitors, skilled at selling and providing service over the phone—at half the cost of counterparts in the field—the hybrid wholesaler is an untapped resource at 42% of firms.”

Since the use of hybrid wholesalers varies widely at different fund companies, the study found that most hybrid wholesalers worked from the firm’s main or satellite office; communicated primarily via phone and computer; sold to and serviced advisers; travelled up to 70% of the time; and, earned 40% of the average field wholesaler’s compensation. 

These are impressive figures, especially for small fund companies with limited personnel, budgets and time.

The core of any hybrid or virtual wholesaler system is the use of readily available technology offered by a mutual fund company’s own website. Small to mid-sized fund companies that have hybrid wholesales can use the broad distribution reach of their websites to present the benefits and accomplishments of their funds to RIAs nationwide, while their hybrid wholesalers:

• Work from the firm’s main or satellite office;
• Communicate primarily via phone and computer;
• Sell to and service advisors nationwide;
• Earn 40% of the average field wholesaler’s compensation.

From Hybrid Wholesaler to Virtual Wholesaler

Smaller fund companies that can’t afford an in-house hybrid wholesaler may rely entirely on the website to do their selling for them. With a good website they can still:

• Develop and present customized comparisons of their funds against other competing ones;
• Highlight new fund, manager, and performance achievements;
• Maintain total content and editorial control over their message distribution, timing and audiences.

With a content-rich, up-to-date website more RIAs can learn about a fund company directly from the source.  When there is direct communication with the home office, RIAs feel more confident about the company’s funds, performance, personnel, and philosophy and investment strategy.

Changing Distribution Channels; An Opportunity for Small Fund Companies

Changes in the way investment products are sold are disruptive, but those changes also present opportunities for small- to mid-sized fund companies. With significant pressures on the existing in-person national wholesaler system in terms of its costs, knowledge base and time management the time is ripe for the “fund website as virtual wholesaler”.

Smaller fund companies can gain the same online visibility as larger companies by increasing the quality of content, usability and features of their websites. Google and other search engines don’t care about the size of the company that publishes a website, they only care about the quality of a site’s content. Higher quality content means better search engine rankings which translates into more site visitors.

Content-rich websites offer smaller, overlooked fund companies a national RIA audience, and position them alongside other large fund companies, which have spent millions of dollars to develop their own sites.

To be a powerful marketing tool and reach as wide an audience as possible, a fund company’s website should contain a complete array of the company’s fund performance data, downloadable sales materials, and portfolio manager commentaries and videos.

Small to mid-sized fund companies typically have limited resources available to maintain their websites. To realistically keep content fresh and up-to-date the website must be easily maintained by a single, internal website administrator. The website should have a content management system that facilitates:

• Collecting content from a variety of contributors;
• Getting content approved by compliance;
• Posting the content to the website;
• Automatic record keeping of any site changes or additions made to the site for future reference.

Websites that provide independent fund companies with security, easy-to-use content management systems, total editorial and data presentation control, and fully-compliant recordkeeping systems, provide a national sales platform to the growing audience of RIAs looking for new investment solutions for their varied clientele.  A content rich, easy-to-maintain “virtual wholesaler” website may be the most cost-effective way for small to mid-sized fund companies to reach a national RIA audience and share their investment strategy with RIAs nationwide.

*“The New Mutual Fund Distribution Model: Doing More with Less,” Frank Polefrone, Access Data, Money Management Executive, Feb. 2, 2009.