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- Avi Nachmany
- Director of Research, Strategic Insight
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- DC investments in mutual funds: $2.3 trillion; mutual funds oversee half
of all DC assets
- Past decade: fund investors net purchased $700 billion within their DC
accounts; in addition, they earned about $1 trillion due to appreciation
- IRAs: almost all net flows past decade seeded by DC rollovers; and IRAs
invested through mutual funds also earned about $1 trillion past 10
years
- Majority of mutual fund shareholders are introduced to mutual funds via
their DC plan. Subsequently, many expand their investment portfolios,
for both retirement savings and other purposes, using mutual funds.
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- Retirement intended investments (DC,IRA,VA, and also in taxable
accounts) account for 70-80% of equity fund assets and majority of
inflows; (’01-02 such investments provided more than 100% of equity fund
net inflows, in ’03-06, 70% of inflows);
- As such, retirement investments stabilize and strengthen the industry;
- This is why most U.S. fund investors buy and hold for the long term; and
maintain their “strategic” asset allocation
- New investment rules and PPA seed more growth.
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- For each investor, a personal “planning time horizon” which shrinks fast
with “perceived personal risks” but only slow with age
- Most fund investors inactive
- Redemption rise in up market, fall down market
- Redemptions = sum of $ redemption out of a pool of assets. Redemption Rates imply, misleadingly,
homogenous withdrawals activity; thus such rates means little,
especially not “Avg. Holding Period” (blaming the many for sins of few)
- In your control: targeted focus.
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- Check the example:
- Icarus Growth fund, IPO 1991: 100,000 shareholders: 25% buy-and-hold for
20 years; 25% B&H 10 yrs; 25% B&H 5 yrs; 25% trade
once-each-year.
- Each month 3% of assets redeemed; Avg. annualized redemption rate = 34%;
Is expected holding period 3 years?
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- It’s in the nature of the customer: stock vs. bond; retirement vs.
short-term; by distributor, by FAs
- Identify which 10% of relationships to focus on (high $$$, low
engagements past 12-18 months); technology system commitment needed
- Once identify, stimulate proactive engagements
- One more to do: enrich, in non-performance ways, the new relationships
(at risk) during bonding period
- A respected leader in firm must lead effort.
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- Q: which trigger: relationship vs. performance? A: 80% (relationships) :
20% (performance disappointments)
- Naturally, shining Morningstar(s) faster sales, dimming stars faster
redemptions;
- Importance of societal shift to satisfying life needs (“need centric”),
not just “great funds”; with need (outcome)-based approach and more
asset-allocation sales, less focus on performance.
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- A compelling reason to buy, and a compelling reason to redeem; funds are
not commodities….
- Style-adherent risk-adjusted past return excellence – a magnet for
inflows; winners grow, losers shrink
- Take your pick: Morningstar Stars, Lipper Leaders, or just 3-year simple
look back – any such measure correlates well to flows.
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- “Seattle” vs. “Miami” positioning: which to buy for “win probability”
for next 3-5-10 years? not just looking back, and “investing as
consumers”
- “Stars” predictability, or lack thereof
- Dynamic rebalancing away from “hot” style; toward an investment process,
asset-allocation, not just look-back ranking.
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- Dramatic accelerating of Fund-of-Funds, mutual fund wraps, and dynamic
rebalancing; next, maybe, Liability-Driven choices
- Satisfying life needs (“need centric”), not just offering great products
(“product centric”);
“income-at-retirement”, “educational savings”, “wealth
protection”, “charitable giving”…, not XYZ 5-««««« fund or just one-time 60:40 Asset
Allocation…;
- How to teach people to invest “not as consumers.”
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- Making choices in our lives based on “past experiences” is common, if
not innate
- Buying another Lexus, Godiva, or Jimmy Choo makes sense
- Buying the “hottest” (stock, fund, style) generally does not
- The US financial industry is transitioning towards offering more
selections featuring “asset allocation by default”.
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- “Investing as Consumers” dilemma, the Herculean task of investor
education, and other drivers of the explosive growth of “Assembled
Advice” and asset allocation processes
- Because of fiduciary concerns, “Assembled Advice” will increasingly dominate
financial advisors’ / DC plan recommendations
- For example, a prudent higher allocation to int’l equity funds (currently
29% of equity fund overall assets); more to come (a move away from
“home-bias” in Europe, Canada, Japan …)
- Or, adding to bond fund exposure during flat yield-curve periods.
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- Funds-of-funds: 2007 flows ~$140B; ’06 $110B; ’05 $80B
- Fund wrap inflows rising: $85-90B in ’07 flows, up from ~$60B in ’06
- Asset allocation programs’ net inflows > 2/3 of all open-end
stock/bond fund net inflows
- How can you participate in the restructuring of the wealth management
process towards asset allocation, evidenced everywhere?
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- Huge sales gains by FoFs, “Wraps”, and the like; more to come due to
U.S.’s 2006 Pension Protection Act; marketplace forces a transition to “asset
allocation by default”
- “Choice within constraints, freedom within limits, is what enables the
little fish to imagine a host of marvelous possibilities” (Barry
Schwartz, The Paradox of Choice: Why More is Less, Page 236 and the
closing sentence)
- Using a “total wealth” frame of thinking, instead of zeroing in on
individual investments (for which perceived risks are amplified) lead to
better long-term decisions (as suggested by Daniel Kahneman, recent
Nobel Prize winner); funds-of-funds or “wrapped” investments help to
keep investors more in “total wealth” frame of mind…
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- Appoint a respected leader for CRM; Set expectations, ownership inside
your firm
- A strong leader is must, since “no one wants job” since “no way to
measure success”
- Can you increase retention by 2% of assets?
- Plus, those that leave unhappy do not come back and also complain to
their friends…
- To succeed in CRM, only unrealistic expectations of better retention get
people to act…
- Change how a sales organization thinks?
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- Product: conservative, preservation core / exploratory promises;
- Marketing: holistically to the household, not just head; Establish an elegant,
product-neutral platform for life-time relationship paid as long as they
invest;
- Retention: defending against relationship failure; remembering HNW pride.
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- Biggest risk: 1 purchase, high $$$, no follow up, no other active
engagements with your firm
- Partner with distributors: update lists of fin’l advisors, offices with
excessive redemptions, fine-tune “cost sharing” to retention
considerations
- Also, focus on key brokers: those ready to retire; rollover specialists;
and bond with new brokers during formative years
- Wholesalers incentives: strategies to increase B/D depth; adjust to
unstable assets…
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- Establish non-performance branding
- Personify management company
- Engage investors via two-way Internet, MyAccount, B/D platform, others..
- Call center triggered response to customers seeking redemption
- Data mining, watch list, contingency plan, local HNW seminars.
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- “The investment process evokes many of basic psychological needs of a
human being: the need to make meaning of confusing perceptions, the need
for validation and affirmation of one’s self, the need for a connection
with an admired other, and the need for belonging to a group of
like-minded others.
- The highest use of financial consultants occurs among investors
showing high scores in “other-oriented, high-anxiety, and high-optimism”
Overall, financial consultants that are committed to an emotionally
engaging and ongoing relationship with their clients, but also represent
solidity and conservatism, would be most successful”. (Dr. Richard
Geist).
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- Adult learning: cognitive, emotional, instinctive feel; visual,
linguistic, analytical communications;
- Simple, but not simplistic;
- Where do you hit the wall; proactive follow up…
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- Port in the Storm?
- Experiential Investing?
- Invest with Confidence?
- Join a Winner?
- Align with the Small, Smart, Nimble?
- Be Realistic?
- The Investment Process is the Brand?
- I am Here for You!
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- Need-based marketing vs. product sales
- Long-term financial planning vs. short-term opportunistic purchase
- Expectation management at purchase
- Buying the process vs. buying (past) performance (non-recurring)
- Choice of performance measurement (return, risk, stars, appropriate peer
group, FoFs).
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- Engage new investors to your firm during first 1-2 (honeymoon) years
- Do they have multiple bonding points (funds, VAs, cash, etc.) vs. just one-time purchase, no
follow-up engagement
- Segment investors closing accounts vs. partial redeemers.
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- CRM response team: overwhelm with kindness
- When failed, bridge, immediately, psychological gap of relationship
discontinuity
- Re-market, seasonal needs, etc.
- Remind them that you want them back.
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- Engaging the financial consultant: helping them build their practice
- Engaging the investor in a non-performance relationship: creating an
enjoyable, repeatable experience
- Aligning Web platform to help brokers; learning / cognitive styles
- Organizational stability and coherent mission.
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- For managers and distributors: process and business integrity,
transparency, returns and risks, fees, alternative investments and
alternative pricing
- Strategic PR function
- Relationships with investment analysts, performance tracking companies,
etc.
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- After crisis:
- 1. Stimulate communication; encourage talk about anxieties, perception…
- 2. Provide perspective,
framework, facilitate coping.
Separate stock market chaos from your company’s stability.
- 3. Help investors restore sense
of mastery; facts, alternatives, actions; back in control…
- 4. Enhance self esteem; what can
be learned.
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- SI Book from 2000 Post-Bubble “Enhancing Relationship Management and
Customer Retention”.
- SI “Strategies for Action” Oct. 2001
- Other past studies on sionline.com.
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- Simfund Databases: Funds and VAs
- SI On Line.COM
- SimFund Filing.com
- Strategic Insight Global.com
- Annuity Insight.com
- Strategic Insight 212.944.4455 Avi@sionline.com
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Notes
