Big-name money managers are devoting significant resources to convincing small financial planners to recommend their mutual funds to clients.
The list of money managers ranges from Strong Funds Inc., Montgomery Asset Management and Lexington Group of Investment Cos., all of which began focusing on planners early on - meaning a year or two ago - to more recent entrants like Nicholas-Applegate, Kemper Funds and NationsBank.
The financial planner market, comprised largely of SEC-registered investment advisers (RIAs), has become too big to ignore. According to a study by Eager Associates, Atlanta, financial advisers run an estimated $1.1 trillion, which is less than 10% of the approximate $12 trillion controlled by individuals. Assets are projected to grow at an annualized rate of 26% over the next two years to total at least $1.8 trillion by 1998.
Eager projects mutual fund assets managed by financial advisers may total about $600 billion, representing almost one-fourth - 23% - of mutual fund assets in the U.S. Mutual fund assets controlled by financial advisers are expected to increase to almost $1 trillion in 1998.
Even the Vanguard Group, Malverne, Pa., has begun offering fee-based financial planning services to the public.
The growth in RIAs also has been fueled by mutual fund marketplaces like those of Charles Schwab & Co., Fidelity Investments, Vanguard, Jack White & Co., National Financial Corp. and Waterhouse Securities, which enable RIAs to cost-effectively trade funds for clients through computer linkages.
They also provide fund information and may even give client referrals.
"Because financial advisers do diversify client assets among a number of mutual funds, they tend to do business with major discount brokerages. As long as you're in those programs, you have a better chance of being included in financial advisers' programs but it doesn't mean you will be," said Larry Kantor, managing director of the $1.8 billion Lexington Funds, which has about five full-time people devoted to the RIA channel. Lexington also sends daily fax bulletins alerting planners about key market news, particularly in emerging markets.
The raised stature of RIAs reflects the continued blurring of the lines between load and no-load funds. Typically load funds such as Nicholas-Applegate waive sales charges on their A shares in order to be sold through fee-only planners. (Fee-based planners use both commission-based and no-load funds.)
At the same time, no-load fund families like Strong are making their way into wrap fee programs of full service brokers using the same sales forces they use to target RIAs.
What's more, it is rumored that Merrill Lynch & Co., New York, may include no-load funds in its Asset Power program, which allows participants to trade stock and bonds for an annual fee instead of commissions.
"The inclusion of directly sold funds in the plan is a watershed in fund distribution, signaling the obsolescence of the load/no-load dichotomy and the growing dominance of fee-based services in fund delivery," said a newsletter published by Financial Research Corp., a consultant in Chicago.
Firms that launched marketing efforts dedicated to RIAs in 1994 and 1995 are already reaping rewards. Since focusing on planners 14 months ago, Rochelle Lamm Wallach, president of Strong Advisory Services, Menomonee Falls, Wis., said 20% of the firm's $14 billion in mutual fund assets and an even higher percentage of sales now come from the distribution channel.
But Kurt Cerulli of Cerulli Associates, a Boston consultant which published a report on the asset explosion of this market, warns that firms be cautious about devoting resources to the distribution channel. After all, it's hard to cut back on a large salesforce in the event of a down cycle for mutual funds.
In addition, hiring a sales force is a foreign undertaking to direct marketers, who sell through advertising, and institutional money managers, who have relatively few key marketers.
Load fund companies must be careful not to approach financial planners - who view themselves as fiduciaries - the same way they approach brokers-dealers.
"The no-load fund industry just hasn't had to segment their customer base before. They're realizing there's a tremendous opportunity here through the advisers market. Once they recognize it, they want to support it," said Pam Maloney, vice president of Schwab's Mutual Fund Marketplace, San Francisco, which has more than $28 billion in customer assets of which nearly $16 billion are from registered investment advisers.
As a result, some firms are stumbling in their efforts to reach financial planners, according to Ms. Maloney.
One common mistake occurs "when a fund company hires a person who acts like a load fund wholesaler who comes in and tries to teach (RIAs) how to sell rather than allocate assets," Ms. Maloney said. "I've heard it enough that we're communicating (the problem) to the fund companies."
Not every firm is hiring a dedicated sales force. Some are taking a less costly route and communicating with planners through specially tailored newsletters; Internet sites; teleconferences with portfolio managers on their own or sponsored by discount brokers and even holding annual RIA conferences. They may also have 800 numbers geared specifically to meeting the needs of financial advisers.
Nations Fund family, Charlotte, N.C., with more than $18 billion in 44 mutual funds, announced this month that it is going no load, largely to target fee-only planners and brokers. To support the initiative, the firm plans to triple its field sales force to reach planners and brokers and plans to increase by 17% its internal sales support team that services shareholders, planners and brokers.
"Nations Fund firmly embraces the vision that investors must have the ability to select any level of service they need when they buy a mutual fund and to pay their broker or planner accordingly for value-added advice. ... We realize fund sales may decline in the short term through some channels by doing this, but we are long-term players and we know this is where we need to be," said Mark Williamson, president of NationsBanc Advisors Inc., manager of the 5-year-old family of funds.
The $21 billion PIMCO Advisors Funds, Stamford, Conn. on March 25 introduced an automated telephone information system for RIAs and their clients, providing round-the-clock access to daily fund and market results and access to pre-recorded messages from each portfolio manager.
Nicholas-Applegate almost a year ago added a team of 10 sales professionals to target the financial adviser market in addition to its 10 sales professionals targeting wirehouses. Said James Szabo, senior vice president and national sales manager, who joined the firm from Kemper to head the effort: "If we want to be a long-term player in mutual funds, we shouldn't rely on one channel."
Navellier Fund Group, Incline Village, Nev., just launched a no-load fund family in part to help it target the financial planner market. It also is subadviser for the Northstar family of load funds.
Kemper Funds, Chicago, has formed a new distribution unit to focus on the growing fee-based adviser and mutual fund wrap marketplace.
"While we are fully committed to selling our funds through the traditional channels of distribution, we recognize the increasingly important role of registered investment advisers and fee-based programs," said Jim Greenwalt, executive vice president and director of sales for Kemper Distributors Inc., the principal underwriter and distributor of the $45 billion Kemper funds.
Kemper hired John A. Norris as a first vice president to head up the new registered investment adviser unit. He was a senior vice president of Cozad Asset Management Inc. He will seek to form strategic alliances with fee-based mutual fund wrap programs.
Montgomery Funds, San Francisco, which participates in fund networks of Fidelity, Schwab, Jack White and First Trust's DataLynx network in Denver, was early in its dedicated effort to the RIA market. In the spring of 1994, it launched the Montgomery Advisors program.
"Rather than trying to service these more experienced professional investors through our retail staff we made a stand alone effort," said John Story, executive vice president.
The firm hired three marketers as well as in-house client service people. The marketers are out in the field, just like wholesalers which call on broker-dealers for load funds. But there's a difference.
For instance, on sales material "you can't have Mr. and Mrs. Main Street on the cover with a child and a dog. These people want facts, not fluff."
Strong's effort is staffed with about 20 people including eight sales people who travel nationwide, five internal marketing support staffers, a national sales manager and clerical people.
Strong has also built its own operational capability to support the effort. It does business electronically with brokers and insurance companies and has operating links with major mutual fund clearing firms such as Schwab and LINSCO Private Ledger.
Strong and other firms sponsor periodic teleconferences with portfolio managers, and Strong will hold its first adviser forum in May with 40 top financial advisers and 20 Strong portfolio managers.
RIAs typically advise individuals, retirement plan sponsors and small business owners on investing, often through no-load mutual funds. They might also provide advice on tax issues, estate planning and insurance.
Unlike securities brokers, who might be tempted to recommend one fund over another because it offers a higher commission, fee-only planners collect a yearly fee based on the percentage of assets they oversee. Fee-based planners use load and no-load funds.
