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Rating:How Will Sept 11 Effect Funds? Not Rated 3.0 Email Routing List Email & Route  Print Print
Tuesday, October 09, 2001

How Will Sept 11 Effect Funds?

Reported by Sean Hanna, Editor in Chief

The fallout of last month's terrorist attack on the World Trade Center is likely to be diffuse rather than direct when it comes to the fund industry. This is the simplest takeaway from a special meeting hosted in Boston by Graylyn Associates and Financial Research Corporation (FRC) to explore the fallout from the attack. Panelists seemed to agree that there are no magic bullets to solve the issues raised by the attack and that it likely speeded the unfolding of existing industry trends.

The special conference was put together in the two-and-half weeks since the attack and was simulcast throughout the Web. Graylyn's Darby Hobbs reported that sixty people attended the conference through the Web simulcast. Those participating through the Web were able to view panelists and submit questions via email as well as listen to the discussion.

The most industry's most obvious response to the attacks, said speakers, was to restrict employee travel and to place a more urgent emphasis on electronic wholesaling (ewholesaling). Yet, fund firms were already developing tools to assist wholesalers prior to the attack and at least one panelist expressed his belief that the human touch cannot be removed from this critical function. Other immediate actions taken by firms, said panelists, were to review their backup plans for database and their disaster planning.

Longer term after-effects from the attack may be harder to disentangle from trends that were already emerging. Fund flows may slow in response to the attack, for example, but they were already slowing. Even a shift in allocation of the shareholder assets from equities to fixed income had already started prior to September 11 in response to the current bear market.

Speakers also predicted that fund firms will find more sales flowing through intermediaries as investors seek more handholding and that firms with more simple messages and products will do best in the new environment.

"The market has grown increasingly more complex in recent years," explained J. Heywood E. Sloane, principal at Diversified Services Group. "The ones who will redefine themselves are the ones who will find out how to simply convey to a more confused and overwhelmed consumer what it is they do." Firms will need to master the art of "I have a simple solution that fits," he explained.

A Smaller Industry

Yet Tom Mack, president of Thomas H. Mack & Company, may have voiced the fears of many industry executives when he concluded that the industry will be smaller in the years ahead. This shrinkage will likely cover people, products and, though Mack did not say so, assets.

Mack pointed out as of the end of August more than a quarter (27 percent) of funds held fewer than $100 million in assets and were more than three years old. He pointed out that these were seasoned products yet they had failed to attract what many vendors would believe to be a viable asset base.

"There are a lot of small funds out there and this may be a time that people decide to do some product reorganization," he speculated.

The industry also faces a shifting landscape as one pillar of the industry's growth -- the 401(k) market -- matures. Ron Bush, a consultant with Brightwork Partners specializing in the retirement market, pointed out that the defined contribution assets are on pace to shrink by some seven to 10 percent in 2001.

Falling assets are an especially hard blow to 401(k) providers who have followed the strategy of giving away services for free to build market share. Fully ninety percent of the segments income is derived from asset management fees, said Bush. With assets falling, the trend is for vendors to review their commitment to the full-service 401(k) business.

"To the extent that they [fees from assets] stay down a significant period of the time you are going to see these trends move more rapidly," he postulated. "This is a consolidation that needed to happen anyway."

More eWholesaling?

Panelists seemed to agree that revolution in wholesaling will pick up pace in wake of September 11. Those events may also benefit firms that had previously felt behind in the wholesaling race.

Firms that had invested in building inside wholesale forces to save costs while enviously watching competitors build large external wholesaler teams may suddenly find themselves better situated than their rivals. This is because travel restrictions and fears are shifting attention from in-person visits to more remote touching using technology.

Charles O'Neill, principal Diversified Management Resources, predicted a further consolidation of wholesaler territories and a move from outside to inside wholesalers. "Second tier firms that are trying to be first tier in the services they provide may need to do something," he added.

Steve Miyao, founder and ceo of Kasina, pointed out that the firms still need to gather assets even as they face corporate wide travel bans. "How can they do that if they do not travel?" he asked. "How can we use technology to build these relationships in a more cost-effective manner? Many firms are moving into that technology faster than they had planned."

External wholesalers will never fade away, said Miyao, but he does foresee an evolution in the divide between internal and external teams. He sees outside teams focusing on the most profitable clients while internal wholesalers focus on less=profitable clients.

Yet, Sloane raised the possibility that eWholesaling faces a number of challenges. Spreading computer viruses and users lack of comfort with technology will impede ewholesaling and other etools, he contended. "There will be a reticence of people using new tools," he told the audience.

These problems are not the only reasons panelists predict eWholesaling will not be a magic bullet. "Investment advisors have desktop technology that screen the great number of funds from their universe," said Donald M. Hawley, president of ACS Financial Solutions. "No passive marketing is going to jump past this. Know who your customer is, know what type of allocation they use and build human connections as to why you should do business with me. eWholesaling will be very important for support materials."

Troy Shaver, vice chairman of GoldK, agreed that the market is not yet ready for eWholesalers. Shavers based his observation on experience gained through jumping from the traditional side of the fund business to the head of a Web-based 401(k) administration firm.

His firm tried eWholesaling but discovered the market needed training that had to be done the old fashioned what by wholesalers making personal calls.

"I can't tell you when it is going to change, but I do not see the human element going away anytime soon," Shaver concluded. 

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