Other Investment Vehicles to Eclipse Mutual Fund Net Sales

Mutual fund net sales will trend up by 2% annually, but investors will have to look elsewhere for the real significant growth, according to a new study.

The Financial Research Corporation (FRC) said its new research predicts mutual fund sales reaching $340 billion by 2012, but other products will enjoy a growth rate eight times that of net fund sales. Exchange-traded funds (ETFs), managed accounts, and hedge funds should all see double-digit net sales growth, FRC said in a news release.

The report examines trends and behaviors impacting the future of mutual fund sales through the six intermediary channels (national brokers, regional brokers, independent brokers, banks, insurance carriers, and RIAs).

“Another significant shift we project is the continued increase in gross sales via the intermediary distribution channels relative to the other channels,” said Ian Rubin, lead study author and senior vice president of retail investment markets research, in the news release. “Gross sales through intermediary channels will represent 61% of sales by 2012, a significant increase from 50% in 1999. That growth will come at the expense of the Direct-to-Investor channel, which will continue to atrophy significantly.”

The report also says that national brokers will see great change in their distribution channel. “Among the issues are Wachovia’s purchase of A.G. Edwards, which may trigger a series of other mergers that could fundamentally alter the distribution strategies of fund companies, the growing use of alternative products, and the increasing influence of due-diligence groups at the home-office level in selecting products for distribution through their advisor forces,” Rubin said.

The independent channel should see steady sales growth over the next five years. FRC estimates that mutual fund assets held in the channel will reach $830 billion by 2012, a compound annual growth rate of 12%. The number of independent advisers has doubled over the past three years due to adviser migration to the channel and the transition of larger firms, such as Ameriprise, to the independent category.

“Over the next five years, we see the bank channel growing quickly and improving its positioning relative to other intermediary distribution channels,” said Rubin. “Among the forces in play: the wave of bank 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.’

Information for obtaining a copy of the report can be found at http://www.frcnet.com/frc-market-sizing-2007-study.asp.