The shift away from front-end sales loads is continuing, consulting firm Strategic Insight
has found in a new study. In 2007, around 60 percent of new fund sales through intermediaries occurred without front-end sales loads.
Entitled Fund Managers Focusing on Intermediary Sales: Trends in the Use of Share Class Pricing and Distribution Channels
, the study also found that mutual fund sales through no-load and load-waived distribution channels such as mutual fund wrap programs, fee-Only RIAs and DC-IO plans were the fastest growing distribution channels.
Small and start-up fund companies may find this news disconcerting as the only channel listed above that is a relatively simplee option for them to sell through is the independent RIA channel.
To sell through the wrap programs, firms traditionally need a long standing relationship with a wirehouse and gatekeeper. The DC-IO channel is also not accessible to small fund firms as it requires a recordkeeping operation an the resources to hire a wholesaling team to focus on the area.
Company Press Release
NEW YORK, NY – May 29, 2008 – Sales of U.S. mutual funds through brokers and financial advisors continue to undergo a secular shift towards fee-based compensation, and away from the long-established model of intermediaries being paid commissions at the point of sale, according to a new study by Strategic Insight.
These findings come from SI’s recent report, “Fund Managers Focusing on Intermediary Sales: Trends in the Use of Share Class Pricing and Distribution Channels.” The study was based on a survey of virtually all the large companies that distribute primarily through financial advisors; survey participants managed in aggregate 52% of industrywide U.S. open-end stock and bond fund assets as of the end of 2007.
In 2007, about 60% of new fund sales through intermediaries occurred without front-end sales loads , combining sales of either no-load share classes or traditional “A” shares where the loads have been waived (often because they are sold through 401(k) plans, in fund wraps or similar platforms, or through RIAs).
Moreover, among the “A” shares that are sold with point-of-sales commissions, the trend is away from “A” shares sold at 4%+ commissions. In fact, mutual fund sales through “A” shares carrying loads of 4% or more represented just 6% of intermediary-distributed firms’ total fund sales in 2007.
“This data shows the obsolescence of the public debate over the prevalence of ‘high-commissions’ at the point of sale,” said Avi Nachmany , Strategic Insight’s director of research.
Clearly, advice in the mutual fund business is increasingly provided through fee-based accounts. Not surprisingly, SI’s survey found that the fastest-growing distribution channels last year were those that rely most on no-load and load-waived share classes. These include:
· Mutual fund “wrap” programs, which are a large part of broker-dealers’ shift from commission-based sales to fee-based “advice” accounts.
· Fee-only Registered Investment Advisors. The RIA population is drawing advisors seeking fee-based business and independence, and mutual fund management firms are putting more emphasis on reaching this audience.
· Investment-only Defined Contribution plans (IODC), where sales by intermediary-distributed fund firms rose 33% last year. This market should continue to grow rapidly, partly helped by the Pension Protection Act.
Rapid growth occurred not only in the above-mentioned fee-based platforms, but also in level-load shares (typically “C” share classes), which saw sales rise by a robust 26% last year, thanks to more financial advisors using these shares as a substitute for fee-based relationships.
“Strategic Insight’s survey findings offer an important context to the deliberations about the most cost- and tax-efficient way to pay for advice, deliberations which are likely to intensify once the SEC proposes its modifications to Rule 12b-1,” said Nachmany.
“The financial service industry continues to move towards a culture of ‘advice and relationships’ often packaged with an assembled portfolio of investments,” said Nachmany. “And the retirement of Baby Boomers, who will need more customized counseling on income-in-retirement, will only accelerate these trends going forward.”
Now in its 22nd year, Strategic Insight is a well- respected research firm for the mutual fund and wealth management industry, providing clients with in-depth studies, consultation, and electronic decision support systems. Strategic Insight assists over 250 organizations worldwide , including the largest mutual fund management companies operating in the U.S. and the largest insurance companies serving the VA business. SI clients are responsible for about 90% of all U.S. mutual fund assets . Strategic Insight also helps over 70 of the world’s largest asset managers expand in Europe and Asia . For more information, visit our home at www.sionline.com.
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