A new study from Greenwich Associates finds that changing investor needs and the shift to open architecture are changing relationships between asset management organizations and investment fund distribution platforms. The move to open architecture allows, and in many ways requires, distribution platforms to focus their efforts on delivering best-in-class asset managers to investors and potential investors in every asset class. In response to these new developments a new class of professional buyers is emerging. As their influence grows, these professional buyers are being tasked with the responsibility of identifying investor needs, evaluating providers, assembling effective investment manager menus and — more than ever before — helping end investors choose the best managers.
Changing investor needs and the shift to "open architecture" are altering relationships between asset management organizations and the investment fund distribution platforms they rely on to sell products to end investors, according to new research from Greenwich Associates.
In an open architecture system, investment fund distribution platforms like broker/dealers, bank trust departments, defined contribution record-keepers, third-party administrators, and variable annuity insurance companies offer products from many competing asset managers, as opposed to selling only proprietary funds. The ongoing industry move to open architecture allows, and in many ways requires, distribution platforms to focus their efforts on delivering best-in-class asset managers to investors and potential investors in every asset class.
In response to these demands, a new class of professional buyers is emerging at investment fund distribution platforms, and these buyers are exerting a growing influence on asset flows. The results of Greenwich Associates' 2007 Third-Party Distribution Research Study reveal that, as their influence grows, these professional buyers are being tasked with the responsibility of identifying investor needs, evaluating providers, assembling effective investment manager menus and — more than ever before — helping end investors choose the best managers.
"The end goal is to attract assets to the platform," says Greenwich Associates consultant Lori Crosley, "and the increased use of open architecture means platforms must take a smarter and more strategic approach to manager selection and thoughtful recommendation in order to create demand pull among investors in addition to supply push."
Retirement Needs Spur Product Innovation
When Greenwich Associates asks the professional buyers participating in our 2007 Third-Party Distribution Research study to identify the most important investor-driven trends influencing their markets, more than 20% point to the growing emphasis on retirement income and planning, and almost a quarter cite related innovation in investment fund distribution products, like guaranteed living benefits. At a practical level, demands for new products and advice related to retirement planning and savings are altering the criteria by which these professionals evaluate and select managers for their platforms and recommend management products to their investors.
Investor interest in retirement planning products — a direct result of the needs of an aging population — has been fueled by the nationwide shift from traditional corporate defined benefit pension plans to defined contribution and other structures. This transition has placed the burden of retirement savings squarely on the shoulders of individual workers, most of whom lack investment expertise or professional assistance. As individual investors look for help, the U.S. Congress and President Bush opened the door for plan sponsors to fill the void with the passage of the Pension Protection Act of 2006, which allows employers and their plan sponsors to offer advisory services to employees.
When asked what steps they had taken to adapt to these trends, platform decision makers say they are upgrading product offerings by designing packaged products that provide income and allow for achievement of individual retirement goals. As a study participant from a variable annuity insurance company puts it: "The biggest trend we see is the focus on companies looking at how to unlock the retirement income process, and how to work with clients (investors) effectively to develop a retirement income solution."
In particular, study participants note the growing importance of products such as retirement income vehicles, asset allocation products and low-cost passive funds, like ETFs. Products like target-date maturity funds are gaining traction among investors as simple and relatively professional tools for investors to build and manage their retirement savings over the course of their careers. "Investor needs are changing as Baby Boomers pass from the asset gathering phase of retirement planning to the 'consumption' phase," says Lori Crosley. "As a result, distribution platforms are creating supply by staffing up and reaching out to investment managers or external consultants in order to deliver 'Best of Breed' investment options."
The Opening of Platform Architecture
Broker/dealers have been the most aggressive in adopting open architecture. Only 20% of the broker/dealers participating in the Greenwich Associates study limit the number of managers on their menus. At the other extreme, nearly 55% of registered investment advisors maintain manager limits, as do 50% of defined contribution record-keepers and 47% of annuity insurance companies.
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