Thoughts

The Strange Issue of Price Competition in Asset Management

Posted by Mike McLaughlin on Oct 21, 2010, in Thoughts , tagged with , , , ,

Part 1 in a series of posts regarding price competition.

Two articles from last week caught my attention.  Both centered on product pricing.  One suggested a looming price war among ETF providers, which BlackRock downplayed (FT.com, free registration required) just this morning; another reviewed the implications of Vanguard’s lower investment minimums (WSJ, registration required) for its Admiral shares.

Over the years it seems that 99.9% of all articles on fees in the asset management industry revolve around Vanguard.  But maybe my memory is selective; my experience tells me that price competition is very real across the board.

To illustrate, I spent a few minutes reviewing the mutual fund products offered to me by Merrill Lynch.  A review of available equity funds shows:

  • 1,454 have annual expense ratios lower than 1%
  • 253 have annual expense ratios below 0.25%

The 253 funds with the lowest expense ratios are offered by 31 different providers, 24 of whom have more than one fund among the group.  This is not comprehensive scientific research, but confirms what we all know.  Price is an important competitive ingredient in the industry.

So what is the “strange issue” teased in the title of this post?  It’s the fact that price, a critical competitive variable, is almost completely absent from firm and product marketing. Fees are disclosed, but there’s very little overt discussion and proactive use of pricing in marketing strategies.

Isn’t this a big missed opportunity for fund marketers?  More to come…

Insurance Providers – Simplify!

Posted by Anu Heda on Oct 19, 2010, in Thoughts

I received my term-life insurance statement earlier this month.  It’s a horrible piece of paper with codes, disclosures, and a “premium” on it.  It reminded me of our life insurance buying process.  That went something like this.

Wife:     Shouldn’t we have life insurance now that we have kids?

Me:        I guess.

Wife:     Can you look into it?

[Six months later]

Wife:     Did you look into life insurance?

Me:        Not yet.

Wife:     Don’t you love your children and want them to be secure if tragedy strikes?

Me:        Um, yeah.

Guilty, I embarked on a process to look up rates.  I called agents. I tried creating a spreadsheet with different providers and prices.  And the process was difficult; much harder than buying a new TV or car; similar to buying a home.  There were online questionnaires that ended with “Call this number now!” or worse (We’ll call you every day until you succumb and buy through us.).

A week later, I said exasperatedly, “It looks like we can just get a simple 30-year, $1MM policy through this company. I don’t really know if they’ll be around for 30 years or if the rate is the best.  Let’s just do it.”

Last week, I surveyed 10 friends and family members about their term life buying process.  Not surprisingly, nobody found the buying process easy.  I asked “What was hard about buying?”  Eight people answered with something similar to this, “Figuring out what kind to get and deciding whether or not it is really necessary.”

Now – I understand enough to know that the underwriting and risk management processes are complex.

But difficult back-office processes do not stop other industries from simplifying front-office experiences (do any of us understand how a Google search result works?).  In my research, I found numerous media outlets answering the “what” and “why” questions – like this CNN Money article.  Insurers have important, valuable products; and can ensure prospective customers understand what’s good and the product and what’s good about their product.  Take the first step and simplify.

How Much is a Domain Worth? Nope, Less.

Posted by Mike McLaughlin on Oct 17, 2010, in Thoughts , tagged with , ,

When we launched Naissance, we tried to get the domain naissance.com.  We got in touch with the owner of the domain and received an e-mail response that stuns me to this day.

As a Sunday diversion, here’s that response, along with my thoughts as I read it.

Hi Michael,

Thank you for your enquiry.

A search for “naissance” shows approximately over 27,300,000 results from Google.

I’m pretty sure I’ll only care about one of those.  And isn’t more results actually a bad thing?  Less competition sounds much better.

Names such as naissance.com are very much in demand especially as there are more than 60 MILLION domain names currently registered.

60 million.  100 million.  2 billion.  Who cares?  I get that this is supposed to make me think “Wow!  I really need to buy this domain!”  But logically I can’t quite figure out how.

If you consider that just recently Fish.com sold for $1,020,000, MyPremierCard.com for $135,250, JMM.com for $55,000 and HorseSupplies.com $52,500 etc there have been many other 5 figure sales – I’m sure that our asking price could be considered an investment for a domain of this quality.

This is my favorite part of the e-mail.  I laughed out loud when I read it.  Fish.com?  I’m not sure there’s a less similar domain or business.  And take a minute to check out HorseSupplies.com, I think it’s fair to say the buyer got ripped off.

The price of this domain is £16,500 Great British Pounds or US$27,820 (close offers may be considered).   This is a one off payment for the rights to the domain, however you will be responsible for paying the yearly registration (approx $30).

$27,820.  Seriously.  Our counteroffer?  $200.  It was not considered “close”.

The thing that puzzled me most is that shifts in technology continue to make the actual domain you have less and less important.  Browsers and search engines will find you, if you deserve it, without a perfect domain.  In fact, after a few weeks our site and Twitter feed both sit in the top 35 of 31.8 million search results for naissance. Not bad at all.

Oh, and if you’re interested, naissance.com is still available for purchase.

New Advisors Can Matter a Lot

Posted by Mike McLaughlin on Oct 14, 2010, in Thoughts , tagged with , , ,

Yesterday I had a conversation with a wirehouse advisor, Advisor X.  On the surface, he’s not someone an asset manager would focus on.  He’s:

  • New, with just one year of experience under his belt
  • Managing a book of business in line with his experience

If you asked most firms, Advisor X would not be someone to prioritize.  And yet, he profiles as a good target.  Why?  There are several reasons, but the most important is his affiliation with one of the biggest-producing teams in one of the biggest-producing branches in the country.  He’s closer to top producers than most every wholesaler who comes to the office.

Week after week Advisor X sits in on wholesaler presentations alongside numerous other less-tenured advisors and others looking for a free lunch.  And he blends in.  Wholesaler after wholesaler fails to recognize that he is a potential gateway to the most attractive advisors in the office.

This situation represents a challenge for sales teams.  On a broad scale it requires:

  • Improved understanding of team dynamics among advisors
  • Effective segmentation and profiling of advisors
  • Extensive coaching of wholesalers to enable recognition of these opportunities

More tactically, however, it requires wholesalers to take simple actions and improve the way they decipher branch dynamics.  Identifying Advisor X can be done by:

  • Grabbing 5 minutes of a branch manager’s time to discuss newer staff
  • Using existing advisor relationships to get insight on potential up-and-comers

Established advisors know very quickly who will and won’t succeed.  They know Advisor X.  And since most firms know and target the same advisors, an investment in digging a level deeper can unearth opportunities other firms miss.

Nobody is talking about the five letter word

Posted by Anu Heda on Oct 13, 2010, in Thoughts , tagged with

P-I-M-C-O.  There, I wrote it.  Bond flows continue to outpace equities. And PIMCO is taking a huge leap forward in market share.  But the scale became evident by reading an advisor’s suggested portfolio (WSJ id/pwd required).  In that article, Mr Malloon suggests investing nearly 40% of a model portfolio with PIMCO.  Obviously, let’s give credit where credit is due.  PIMCO is hitting on all cylinders if they’re readily convincing a long-term professional to allocate 40%.

Are executives elsewhere coming up with marketing strategies to counter-attack?  What steps could be taken?  Here’s a simple 4P review (product, price, promotion, place), with a focus on product.

  1. Product – Mutual fund products are closely tied to performance and we all know – nobody can guarantee performance.  Many industry insiders tie flows to performance.  The conventional wisdom is that the PIMCO funds are “killing it.”  Are they? Using Morningstar, PIMCO’s first fund ranks 23rd for 5-year return (see here).  There are 20 fund families outperforming.  Past performance is not an indicator of future performance and communications have to be careful to avoid supporting that message. Nonetheless, is there an opportunity to dispel the conventional wisdom?
  2. Price – Interesting idea – can a fixed income shop promote themselves as “the lower-cost way to fixed income investing?”  I think so (obviously some compliance perspectives will be necessary).  That’s an interesting strategy.  That firm will learn: what is the sensitivity to price for fixed income?  Also, how robust are the PIMCO margins – will they match the lower cost?
  3. Promotion – PIMCO, Bill Gross in particular, does this extremely effectively.  He’s on TV. He’s in the paper. He’s podcasting.  Developing a promotional platform to rival that is difficult, slow, and risky.  Nothing to see here.
  4. Place – Potentially the  best marketing opportunity is to find a channel or distribution partner that is looking to diversify AUM.  Probably, there are risk managers at each wirehouse firm calculating percentage of assets in PIMCO funds and subsequently signaling the potential danger therein.

There are additional considerations and approaches.  The first step is to acknowledge  the elephant in the room.  And that the elephant is hungry.  Is this the new normal?