Distribution Evolves Amid Bad Market

Asset management consulting firm kasina collected information from six of the eight largest banks and wirehouses, and 10 of the 20 largest asset managers, to identify the changes that will occur in the relationship between the large distributors and product manufacturers.

kasina said in a release that investment managers are struggling to understand the implications of the financial crisis and the resulting mergers of the largest banks and wirehouses. The main implication has been loss of profitability. In response, firms have downsized cost structures by an average of 12%, through both staff and spending cuts.

Despite cost-cutting efforts, kasina estimates that net profit margins industry-wide have fallen from 20% to 8% in the past year.

kasina predicts that distributors will maximize their own profitability. They will accomplish that through larger revenue share and further reliance on analysts to guide advisers to utilize vehicles that dually serve the client and themselves. Distributors will increase the level of assets flowing into model portfolios (5% to 30% of flows today) and by analyst influenced non-discretionary assets (at some distributors up to 90%), according to kasina.

The firm also said that mergers among the distributors will ultimately result in fund consolidation within platforms, further reducing the assets of many asset managers.

kasina put forth suggestions for investment managers, such as investing in a National Accounts staff that supports selected models and recommended lists. The firm also recommends more holistic product expertise and increased hybrid and internal products (see “Wholesalers Gravitate to Hybrid Model“).

kasina also encourages investment managers to ensure that their portfolio management team includes people who communicate well with analysts.