Fund Sales Move toward Fee-Based Model

The trend toward fee-based distribution of long-term mutual funds sold through brokers and financial advisers accelerated during the financial crisis.

A study by Strategic Insight found fee-based compensation models gained sales market share last year as fee-charging mutual fund wrap programs and fee-based registered investment advisers (RIAs) were the two fastest-growing areas of fund sales in 2008, according to a news release.

Additionally, the company said, the fund share classes tied to advice were the biggest growth areas in 2008. Altogether, those two categories of share classes accounted for a combined 62% of new fund sales via intermediaries last year among survey participants, up from 56% in 2007, Strategic Insight said. The trend toward fee-based sales was also noted in Strategic Insight’s analysis of 2007 sales last year (see “Mutual Funds Continue Shift to Fee-Based Sales).

Also among the findings:

  • Underscoring the changing dynamic of broker/dealer fund distribution, sales via mutual fund wrap/fee-based advisory programs increased as a percentage of total sales from 24% in 2007 to 27% in 2008. Strategic Insight said that trend was even more pronounced in 2008’s fourth quarter, as wrap/fee-based sales rose to 30% of total sales.
  • The RIA category was the only standalone channel that grew as a proportion of total sales from 2007 to 2008, with a 1.3% gain in fund sales market share. Although still relatively small (8% of total sales), the RIA channel was the fastest-growing among our survey participants for the second straight year.
  • National broker/dealers and independent/regional broker/dealers together accounted for 54% of total sales of surveyed firms in 2008. Those proportional sales were very modestly below 2007’s aggregate sales results, showing the continuing importance of those channels.

Growth of A Shares

The survey also found that the fastest-growing share classes last year were those that offered fees for advice rather than point-of-sales commissions:

Class A shares sold at NAV accounted for 60% of all A-share sales of reporting firms in 2008, and spiked to 67% during Q408. That compares to 2007, when A shares at NAV accounted for 53% of all A share sales.

Sales via no-load share classes accounted for the highest proportion of total fund sales in 2008, at 33%. Those shares also experienced the largest increase as a proportion of total sales in 2008 verse 2007, rising 3.9% (from 29% of total fund sales in 2007).

A shares sold at 4% or higher commissions accounted for just 8% of total annual sales in 2008 among fund managers primarily selling through financial advisers, down from 11% in 2007.

The study was based on a survey of virtually all the large companies that distribute primarily through financial advisers, Strategic Insight said. Survey participants managed in aggregate roughly half of industrywide U.S. open-end stock and bond fund assets as of the end of 2008.