The investment management distribution landscape is intricate and ever evolving, reflecting the maturity of the industry. Investment managers recognize that there is no one-size-fits-all approach to distribution, leading to the adoption of diverse distribution strategies. In the first of a series of three articles, we provided an overview of a distribution strategy and questions for board members to ask the advisers. Given the shifting investor interests and changing vehicle preferences, coupled with advancement in technology aimed at improving sales and enhancing the client experience, oversight of the distribution plan is essential. In this second article, we delve into the current distribution environment, including vehicle competition, the intermediary relationship, and data-driven sales.

Mutual funds are this year celebrated their 100th anniversary of serving investors by providing access to the capital markets and a wide range of asset classes. During that time, mutual funds have been a driving force in the democratization of investing, leading to economic success stories for many 401(k) plans and individual investors. Investment managers constantly identify investment opportunities and design commercial investment products to remain competitive, and that industry creativity also extends into vehicle or wrapper innovation to deliver those strategies to investors. The emergence of new investment vehicles has posed a growing challenge to the traditional dominance of registered open-end mutual funds, with notable alternatives like exchange-traded funds, collective investment trusts, separately managed accounts, interval funds, and others offering investors diverse options beyond the conventional mutual fund universe. 

This choice of investment vehicle benefits investors, allowing them to select the features that best fit their desires and objectives, be it lower fees, intra-day trading, and/or tax efficiency. For investment managers, launching a different vehicle for an existing investment strategy has resulted in future growth potential, often in a new investor segment. Offering the same investment strategy in multiple wrappers across different investor segments also leverages and monetizes established investment expertise and track records. Investment managers commonly pursue building an investment strategy once and selling it into as many segments as possible, but not every vehicle works efficiently in every investor segment.

The question of whether an adviser should convert mutual funds to ETFs or launch another vehicle is also an important one. Many factors enter that decision, including the nature of the investment strategy, willingness for transparency, number of existing mutual fund share classes, and more. The oversight challenge concerns the conflicts of interest that may arise when offering the same or similar investment strategies in different wrappers and/or when investment managers lack comprehensive risk policies, operational processes, and infrastructure for new vehicles.

Thoroughly understanding the adviser’s plans for offering competing vehicles is key for fund directors, and these questions can help a board get to that level of comfort:

• How does launching a new vehicle align within an existing distribution strategy and sales plans?
• Does a new vehicle launch compete with existing funds sold to the same investor segment?
• What is the expectation of asset flows to the existing mutual fund if launching a similar strategy in an ETF or other form?
• What is the process to assess and mitigate conflicts or risks that arise when offering clone or similar investment strategies across different vehicles? Has the adviser assessed:
  • compensation and incentive structure for distribution programs and sales team?
  • use of marketing content and branding from an existing fund?
  • process and records of justifying different fees across vehicles?
  • expense allocation when using existing service provider?
• Does the adviser have the resources, operational procedures, and risk controls in place to support the variety of new vehicles being considered?

Intermediary Relationships

Just as there are challenges associated with offering competing vehicles, another challenge arises from intermediary relationships. Investment managers widely recognize specific market segments and products as primary growth drivers, and many strategically focus on the wealth management and retail sectors to fuel growth. The utilization of third parties, intermediaries, and/or aggregators, which collect and direct assets on behalf of a group of investors, is a prevalent component of distribution plans.  

Intermediaries also play a significant role in the sales of alternatives and other private market strategies. Factors such as sales training, marketing materials, and effectively managing investor expectations gain heightened importance when dealing with sophisticated products sold through an intermediary. Moreover, the intermediary relationship often involves multiple layers, introducing complexity to the overall structure. Numerous insightful industry pieces have addressed intermediary relationships, covering topics such as the intermediary due diligence, cybersecurity, intermediary compensation, and financial assessments. 

From a practitioner’s viewpoint and a point of oversight inquiry for fund boards, an additional consideration arises. Within the investment management firm, determining which group owns and is responsible for the intermediary account once the relationship is sold and onboarded becomes a critical question. Maintaining this relationship evolves into an ongoing group effort involving the sales, client service, operations, compliance, product management, legal, and other relevant teams. Although it might seem akin to any business relationship, it is the continuous required oversight of the intermediary that introduces complexity and necessitates dedicated individuals and subject matter experts. Notably, this group relationship effort may be distributed across teams within an investment manager, each with distinct resources, risk controls, priorities, and incentives.

Understanding how the intermediary accounts are controlled, especially when advisers have multiple third-party relationships, is a crucial consideration with assessing risk and applying oversight. Here a a few questions for board members to consider:

• What is the process for selecting intermediaries or other third parties for asset gathering?
• Who is responsible for the day-to-day oversight, management, due diligence, and site visits of the intermediary relationships? Are the resources sufficient?
• What controls are in place to monitor the associated risks of intermediary or other third-party distribution? 
• What process is in place to monitor how a product is marketed and sold through an intermediary?

Data-Driven Sales

Budget constraints are a persistent challenge in the investment management industry due to fee compression and market competition. Leading sales and marketing teams are adopting various tech-driven enhancements, such as linking CRM tools and sales management systems with data-driven marketing. These efforts aim to boost new business growth and improve client experiences while cutting operational costs. It was the COVID-19 era which emphasized technology in attracting new investors, especially with the shift away from in-person meetings.

By harnessing data insights, firms can enhance precision in their distribution strategies, tailoring content and outreach to specific investor preferences and behaviors. Investor attributes and contact details, from a variety of sources, are continuously updated in sales management and CRM databases. Past marketing campaigns are tracked for investor participation and predictive analysis, and AI is used to anticipate buying trends by investor type. Enhanced, on-demand systems allow interested investors and existing clients to register and opt-in, confirming the quality and impact of marketing content and helping identify future topics of interest.

The advancement of technology in distribution shows no signs of slowing, bringing with it a plethora of compliance and risk considerations. Additionally, outsourced platforms offer a viable option for advisers looking to expand their services. For fund boards tasked with oversight and governance, the following questions can lead to insight into how advisers are embracing digital sales and marketing:

• What role do emerging technologies play in current or future distribution plans? How are the associated risks identified and monitored? 
• What is the oversight of governance process for approving and monitoring the adoption of new technologies for distribution?
• What are the adviser’s policies and standards to determine suitability when promoting investment strategies or funds via a digital, data-driven approach?
• What is the adviser’s data management policy with respect to sales and marketing? What are the policy and standards for storing client and prospect contact information?
• How has the use of digital distribution, technology, and data impacted the client experience and fund flows?

Investment management distribution is rapidly evolving with the proliferation of investment vehicles, the diverse array of intermediaries, and the increasing role of technology in the sales process. Sustaining asset growth in this competitive landscape requires an adaptable distribution model and careful oversight.

In the next installment, we conclude with several additional considerations for directors when exercising oversight.

John Krieg is an experienced fund director and investment executive with 35 years of experience and professional investor qualifications. He served as an interested trustee on the UBS Asset Management Collective Investment Trust board, overseeing a complex funds across passive, active, money market, multi-asset, and alternative strategies; his oversight and governance experience includes fund launches and closures, the contract renewal process, fair valuation determination, and liquidity events. Krieg’s most recent professional role was as a managing director and head of institutional distribution for North America with UBS Asset Management, where he also served on the UBS Global Client Coverage Management Committee. He holds the CFA and CAIA Charters, the CFA Institute Certificate in ESG Investing, and completed the Certified Investment Fund Director (CIFD) program.