Redemptions: a new Urgency and a new Approach (Part 1)

The year 2012 may be challenging for asset managers.  In addition to the ongoing structural shift in asset flows stemming from baby-boomer retirement, continued stresses in the global economy makes it even more difficult for firms to increase assets.

This 3-part series, co-written with Steven Miyao of kasina, will examine why firms need to rebalance their focus on both acquiring net new assets and minimizing redemptions. We will discuss new data-driven techniques to anticipate and mitigate asset outflows and how wholesaler compensation needs to change to align with the firm’s objectives.

In a world with low to zero net inflows, the competition to grab share of a fixed or shrinking pie will increase.  Firms will evaluate all the levers they have in their arsenal to capture asset share.  As always, fund performance, particularly with respect to peer categories, will be a major factor.  But what else can asset managers do to win?

Distribution is one of the most important (and costly) levers at hand.  According to the 2010 ICI Fact Book, 16% of investment company employment is in distribution.  What more can firms do maximize the return on this costly, yet mission-critical, investment?  Historically, asset managers have emphasized gross sales as a measure of distribution success.  Wholesalers are largely compensated that way, and their tools are often geared towards that objective. This approach delivers splendid results in a rosy macro-economic environment. But in a new world of potentially flat asset levels, the focus shifts dramatically to net sales and a much more balanced focus on growing net new business, while also minimizing redemptions.

There is certainly a psychological challenge: sales people are optimists by nature and thrive on the hunt for new opportunity.  Nothing reflects perceived sales success like ‘the big win’ and ‘closing the deal’. You don’t often hear a sales person bragging about ‘not losing the client.’  Sales professionals can easily point to a tangible sale and their role in making it happen.  Yet, retention in the asset management world is difficult precisely because it is hard to define an advisor not doing something as a clearly successful outcome.

Contacting advisors without a finely honed targeting plan is a recipe for disaster. You simply cannot call every advisor who holds assets to ascertain whether the assets are “safe”.  In many circumstances such tactics can actually trigger redemptions.  Restricting your call list to advisors with higher assets, or alternatively, to advisors who have already been redeeming is slightly better, but still too crude to be effective.  To prevent redemptions, you need to anticipate the timing and source of redemptions with much greater accuracy.

But is it really possible to ‘predict’ which advisor is most likely to start down a path of escalating redemptions and when the point of no return has been reached? Are there mitigation tactics that are proven to be more effective at stopping, or better yet preventing, the hemorrhage? Do these tactics need to be adapted to specific advisor segments?

While developing the right redemption strategy and tactics can be challenging, getting it right in ‘the new world’ is an imperative.  Over the coming weeks, we will be exploring what asset managers can do to retain assets. In Part Two of this series, we will focus on analytical tools that asset managers can deploy to help wholesalers anticipate and stem redemptions.  This will expand on concepts introduced in earlier blogs and in our recent whitepaper.  In Part Three of this series, Steven Miyao of kasina will discuss wholesaler compensation and the need to incorporate a net sales component.

Do you have cutting-edge advice on managing redemptions?  We’d love to hear from you.