A new kasina
study has some advice for fund firms thinking about launching me-too type products. Their advice: try the venture capital model of investing and identify gaps in the marketplace and then propose products that will fill them.
Current new product development as practiced by the vast majority of asset management firms is inefficient and unproductive, generating look-alike funds that fail to maximize profits, according to a new study released today by kasina, a management consulting firm serving the financial services industry.
Instead of relying on the present sales-first, consensus-driven approach, firms should learn to invest more like a venture capitalist, taking a larger number of higher risk, higher reward bets with the expectation that one or more of these products will become major successes, says kasina. A detailed discussion of this development approach can be found in the firm’s most recent research report, “Rethinking Product Development.”
“There were nearly 8,500 new mutual funds and ETFs registered in 2006 alone. Of these, over 1,500 were large cap growth products, which was already one of the more crowded categories,” said Anurag Heda at kasina. “If further evidence was needed to demonstrate the inefficiency of current product development efforts, this is it.”
The kasina report identifies three product development techniques as currently holding sway across the industry:
* Do as I say, in which a single individual within an organization drives new product creation based on his or her idea of what the market needs. This approach accounts for about 10 percent of all new products.
* Stage Gate. Eighty-five percent of all new fund products are developed with this process, according to kasina. Ideas pass through “stages” or gates where viability is assessed, often by a committee.
* Multi-process gate. Accounting for five percent of the research set, this process applies relevant gates to specific investment vehicles. For example, a “registration” gate may be necessary for an open-end mutual fund but irrelevant for unregistered products.
“For the most part, the product development process is designed to capture input from wholesalers, Key Accounts, and other constituencies and then to deliver consensus, but great products are rarely built by committee,” said Heda. “The middle ground may be safe, but it’s home to low-risk, low-reward products that are difficult to differentiate.
“Unlike the fictional Lake Woebegone, not every product can be above average,” Heda said.
Taking chances, differentiating products
With distribution shelf space at a premium, asset managers offering only me-too products will eventually be squeezed out of the marketplace, according to kasina. Larger firms, with sufficient capital, can avoid this by leveraging their scale and by adopting the venture capital model of investing in new products. Product differentiation based on identifying gaps in the marketplace is another viable approach. This process is open to firms regardless of size, but it is research intensive. Further, successful differentiation requires that the resulting products be closely integrated with a firm’s overall marketing and positioning efforts.
“New product development is not a goal in and of itself. The goal is to maximize profitability for the firm as a whole. Current practices are in effect fueling a race to the bottom when it comes to profitability. We think it’s time for the industry to adopt a new model,” said Heda.
More information regarding the full kasina report, “Rethinking Product Development,” can be found at: www.kasina.com
kasina is a management consulting firm that is focused on helping financial services companies create intelligent relationships with their investors and intermediaries. By combining knowledge of distribution trends, technological innovations, and marketing strategies, kasina aids leading asset management firms with front-office efforts and publishes a regular schedule of cutting-edge industry research. kasina’s client list includes 18 of the 20 largest asset managers in the United States and leading firms in Canada, France, Germany, and the United Kingdom. An overview of services offered by kasina is available at www.kasina.com.
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