RIAs and Tech Erode the Power of Gatekeepers
In the world of money management, mutual fund and ETF provider executives and salespeople have long known that in order to bring assets in the door, they have to get past the gatekeeper.
This has traditionally meant currying favor with the influencers who controlled which investments, or investment platforms, would be available through their distribution organization. These gatekeepers functioned in both directions - that is, they controlled which fund companies could have access to the distribution network, as well as what funds would be available to the advisors and their end clients.
But times change. Nowadays, the power has shifted closer to the advisor, in a couple of ways. In some cases, the advisor is acting as the portfolio manager, ignoring intermediaries and going directly to the fund managers or assets they want in their portfolio models.
In other situations, the advisor is going directly to the turnkey asset management programs via their core service/technology providers. Either way, the power in the relationship has shifted from the institutional gatekeepers to individual advisors.
"If you are a new asset manager, with a new ETF or new mutual fund, trying to get shelf space in various channels, you'll find that the wirehouse channel is probably still operating according to the old institutional gatekeeper model," says Matt Lynch, managing partner at management consulting firm Strategy and Resources.
"However, as you move away from the wirehouses and look at where the assets are going, you'll see that they're going to the independents - the hybrids and the RIAs, particularly as you go upmarket. Just look at the number of breakaway brokers who are forming large, independent RIA firms. If this is the channel in which you're trying to get traction, identifying whom to call on is getting extremely complicated," Lynch says.
Lynch admits that product creators and service companies can go to the custodians - Schwab, Pershing, TD Ameritrade, Fidelity and others - and try to get accepted into whatever they call their "preferred product" status. But while that may give the firm "shelf space," it does not necessarily provide favorable access to the advisors. Another option is to work through the TAMPs, but again, it's still only a matter of shelf space.
"You can try to call on RIAs directly, but that's a fragmented market and it's hard to find them," advises Lynch. "It's not like you can go into an OSJ or branch office and get in front of 20, 30, 50 advisors. The direct route involves calling on RIAs one by one, but you don't really know much about them going in.
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"You'll discover that no two of them are alike in terms of investment selection, investment committee structure, or decision-making process. Some actually have fairly robust resources and investment committees and CFA types on staff that can complete what one might view as traditional investment analysis and due diligence on products."
Others, though of similar size and serving a similar end client, may have completely outsourced their investment management, and may only be considering the offerings on their platform of choice, be it a TAMP or custodial platform. "If your goal is to distribute product, it is very difficult to distinguish the differences among RIA firms before you call on them," Lynch says.
WHAT TO DO?
There are several ways that firms are dealing with this. Some firms are moving away from building up traditional internal marketing or wholesaling capabilities, and are redeploying those resources to get in front of the TAMPs and other gatekeepers and influencers they feel can help them gain access to the markets they want to penetrate.
Gatekeepers such as TAMPs have been in the fold for a while and are fairly well known, however the emerging gatekeepers, or influencers, are not as easily identifiable. Included in this second category are fintech firms, financial planning/asset allocation software, aggregation tools, etc. In addition, the new aggregators (rollups like Banyan, United Capital, etc.) have positioned themselves as a new intermediary and seek to participate in the manufacturers' or custodians' margins.
"For decades, there has been at least one too many intermediaries in the supply chain, so keeping your cost competitive and your margins acceptable while leveraging relationships with new gatekeepers may be a significant challenge," Lynch explains. "In some cases, they are giving up a portion of their revenue for platform fees or other types of fees particular to those business models. While this may be a way to get started, it's not enough to create momentum and to establish mindshare among the top advisors."
"Asset managers are testing a variety of ways to raise their profile with the end advisor," says Marion Asnes, president of Idea Refinery.
"Thus you see them at conferences, making the rounds and trying to get face-to-face meetings with the end advisor. Some of them are supplementing the conference approach with some traditional wholesaling, calling on larger firms in hope that the flexibility that comes with independence will motivate them to try a small allocation to start," says Asnes, who as former CMO at Envestnet is a relevant source.
For new fund companies entering the market, there are several options. They can go it alone, build the brand and use their industry connections to gain access and shelf space - effectively building the business from scratch. Other options include building a track record by subadvising for a larger asset manager, partnering with another firm that has distribution, or trying to plug in to a couple of large TAMPs early on, giving up a fair amount of the revenue in order to ramp up the assets on a large TAMP platform.
"Going it alone means not buying access to distribution in a way that's going to cost a big chunk of the revenue of the firm over the long term," Lynch says. "Every firm coming into the market place has options whether to build it on their own, or partner with someone else."
"One of the problems with partnering with others is they don't give you exclusivity and they don't give you ongoing guarantees. So you could partner with another organization and find yourself with hundreds of millions of assets very quickly but if one big client decides to go in a different direction, you could also lose a big chunk of assets very quickly," Asnes says.