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Fund Sales to Face More Pressure

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Boston-based Financial Research Corporation has projected that mutual fund net sales should grow 2 percent a year and reach $340 billion by 2012. Other products, like exchange-traded funds, are starting from much smaller asset bases but could expand at eight times this rate, according to the FRC study.

“Mutual funds are facing increasing competition from ETFs, managed accounts and hedge funds, all of which will see double-digit annual growth in net sales,” says Ian Rubin, the report’s lead author and senior vice president of retail investment markets research.

The report, entitled “Mutual Fund Market Sizing 2007-2012: An Analysis of Channels, Sales and Assets,” examines trends affecting mutual fund sales through six intermediary channels (national brokers, regional brokers, independent brokers, banks, insurance carriers and RIAs).

Financial advisors are set to become more important as a sales channel, according to FRC. “Another significant shift we project is the continued increase in gross sales via the intermediary distribution channels relative to the other channels,” explains Rubin. “Gross sales through intermediary channels will represent 61 percent of sales by 2012, a significant increase from 50 percent in 1999. That growth will come at the expense of the direct-to-investor channel, which will continue to atrophy significantly.”

While FRC sees turbulence ahead in general for national broker-dealers, the research organizations see strong asset growth ahead in the independent channel. It puts the number of advisors in this category, including those with Ameriprise, at 145,000 — up from some 77,000 in 2005. As a result, sales of mutual funds through independent advisors could hit $830 billion by 2012, for a compound annual growth rate of 12 percent.

The number of advisors and sales of funds in the bank channel are also expected to be robust. “We forecast banks will experience strong growth in both net sales and assets,” Rubin says. “This growth will be driven by several changes in the banking industry, including the wave of mergers and acquisitions, the use of platform programs to service the lower end of the investor wealth spectrum, and the move toward broader open architecture to improve asset and fee generation.”

In a separate study, “Guaranteed Annuities in Defined Contribution Plans: Current Products and Future Prospects,” FRC researchers predict that annuities will gain further momentum and sales in defined contribution (DC) plans as aging baby boomers seek to create guaranteed retirement income streams. The report looks at this trend and profiles some current plan offerings such as Genworth, ClearCourse, Hartford Lifetime Income, MetLife Personal Pension Builder and Prudential IncomeFlex.

For advisors and others who want to take advantage of this opportunity, there needs to be an improvement in the perception of annuities. “To do this, communication and education at the platform level needs to be adapted so participants are aware that they are purchasing an income option,” says Luis Fleites, vice president and director of retirement markets at FRC. “The goal is not only to promote adoption but to be certain that participants fully understand what they are buying and what they can expect upon retirement.”

Some firms diligently educate plan sponsors, consultants, advisors and clients, while others issue simple written communications. FRC says that such strategies should further evolve as manufacturers and record keepers identify and adopt successful marketing strategies that resonate with both plan sponsors and participants. Plus, new market entrants should be able to take advantage of the progress already achieved in this area and introduce further innovations within DC plans.

Janet Levaux is the managing editor of Research; reach her at [email protected].


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