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Winning the Distribution Battle

The path to sales success: institutional excellence.

John Rekenthaler, 10/11/2013

This article originally appeared in the October/November 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.  

A quarter century ago, the mutual fund business was like the soda business. Just as one soft drink tasted pretty much like another, so too did one mutual fund look like another. The product was important insofar as it needed to be of acceptable quality, so that the customer wouldn’t reject it. The real key for success was distribution. The companies that would win in the marketplace would be those that could best push their products.

A look at the 12 largest fund companies in 1986, by assets under management, tells this story.

Merrill Lynch
Dean Witter
E.F. Hutton

That was some distribution muscle alright. Five of the 12 companies were wirehouse brokerage firms with giant captive advisor forces, even though wirehouse firms as a whole were only a small fraction of the mutual-fund industry. A sixth, IDS, had an even more powerful sales model: IDS’ advisors were restricted to using IDS funds and only IDS funds. Kemper, Federated, Franklin, and Putnam each had armies of wholesalers, in addition to certain market advantages. (For example, Federated was well established with the banks, and Franklin dominated the muni-fund marketplace.) Fidelity’s and Dreyfus’ advertising and extensive favorable media coverage made them household brand names. Their strong brands enabled them to thrive with direct marketing.

There were three major distribution channels back then: proprietary funds with captive advisors; nonproprietary funds that were sold through wirehouses, smaller broker-dealers, and independent advisors; and no-load funds that investors bought directly. Each channel marketed itself differently.

Proprietary fund companies rode the coattails of their powerful national brands. Buying Merrill Lynch, or Pru-Bache, or E.F. Hutton funds meant buying the bull, the rock, and the man who silences a room the moment that he starts to speak. Nonproprietary funds highlighted their independence, suggesting that proprietary funds were run by marketing departments rather than by the investment management group. For their part, direct funds partnered with the financial press to advocate the merits of no-load, do-it-yourself investing.

The arguments were often heated. Morningstar ran two versions of its annual mutual fund conference, the Morningstar Load-Fund Conference and the Morningstar No-Load Fund Conference, because the two groups could not co-exist. Load-fund advocates, armed with consultants’ studies, talked about how poorly direct investors timed their no-load purchases. Sometimes, they also argued that load funds had better total returns as well. In response, no-load funds (again assisted by the media) portrayed financial advice as being costly and biased. The financial advisor was an unnecessary dinosaur; the world was going no-load.

is vice president of research for Morningstar.

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