Distribution Shifts Shaping the Future of US Asset Management

Mike MaInstitutional Investor InstituteSenior Delegate Roundtable

Aspen, COJanuary 19, 2010

Today’s agenda+ There is unprecedented opportunity for institutional-oriented

asset managers to succeed in post-crisis market

Part I: State of retail distribution today

Part II: Signs that institutionalization of retail is happening

Part III: Why this makes sense to act upon in 2010

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State of Retail Distribution

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The retail distribution challenge today+ External wholesaling has been the primary vehicle by which assets are

grown

+ The model has struggled to scale Assume 20 meetings a week and quarterly advisor visits by a very large force of 100

4 Source: kasina, Aligning Distribution: The $500M Challenge, 2007

Two problems with the external wholesaling model+ How do you know you are reaching the right advisors today?

+ What do you do about the ones you are not touching?

Source: kasina, Aligning Distribution: The $500M Challenge, 2007

How have retail organizations tried to respond?+ Cost-cutting through lower cost distribution models and technology

+ Adjusting compensation to get better efficiency from external wholesaling model

+ Creating institutional-like sales functions in national account organizations

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Cost-cutting: Lower-cost distribution models+ Hybrid Wholesaling has been the post-crisis rage

Replace a traditional external and internal wholesaler pairing with one resource that can fill both roles

Will travel only 30-50% of the time at 1/3 the cost of a typical external wholesaler

Some success has been shown in this area in examining 10 implementations of this model

7 Source: kasina, The Truth About Hybrid Wholesaling, 2008

Cost-cutting: Using technology to drive sales+ kasina found that advisors who use an asset manager’s Web sell more on average

Those covered by wholesalers sell 25% when they use the Web site

Those not covered by wholesalers sell 45% more when they use the Web site

Source: kasina, “Your Site Can Sell, Too”, 20088

Adjusting compensation+ Most organizations have an over reliance on gross sales

Questionable linkage from net sales/profit to gross sales

Offers poor cost forecasting

+ Still changes are small and incremental due to cultural inertia

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Adjusting compensation+ Few firms are allocating a higher percentage of compensation to activity-

based compensation

Again, changes are still small

10 Source: MF Wire

Retail Distribution is Focused on Tactical Reform

+ Cost cutting through lower cost distribution models and technology

+ Adjusting compensation to get better efficiency from external wholesaling model

+ Creating institutional-like sales functions in national account organizations

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Institutionalization of Retail

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Investment decisions are being centralized+ Retail distributors will promote product and wrappers, such as the UMA

+ Despite short-term backlash against research analyst recommendations, advisors: Spend, on average, only 17% of their time on investment management

Will forego investment-related activities to focus on client service

Source: kasina, Evolving Distribution Amid Bad Markets, 2009

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Institutionalization of retail distribution

+ Distributors’ investment decisions are data-, not relationship-, driven

+ Research analysts have become the gatekeepers to the distribution platform:

+ National Account functions are expanding to DCIO and sub-advisory

Source: kasina, Cracking the Code, 2007

Key Accounts Strategy Is Requiring a Split of Roles+ Increasingly, firms are separating the job into two roles to assist with:

15 Source: kasina, Beyond Key Accounts, 2005

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Case Study: International Stock Funds

Source: Morningstar Direct Fund Flows Update, December 2009

+ Let’s look at product development of the one traditional equity class that showed inflows this year

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How do stars affect eventual market share?+ kasina examined the market share impact of all international and global fund launches since

2000 before they were given a Morningstar rating

Source: Morningstar Direct, kasina analysis

Even

tual

Mor

ning

star

Rat

ing

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A counterintuitive result+ Why does four-star beat five, and why does one-star show positive change?

Professional buyers are exerting their influence looking for value and story

Be a rule-maker or a rule breaker, do not be stuck in the middle

Source: Morningstar Direct, kasina analysis

Value buying

Story

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Summary: Institutionalization of Retail is Happening+ While early, organizational developments at distributors and asset

managers are in their early stages

+ Professional buyers’ influence is beginning to change the way the that products are bought and sold

Why Act In 2010?

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There are significant reasons to act today+ Institutional organizations are well-positioned to capitalize on this

opportunity

Retail organizations are trying to do what you do

Global and internationalization efforts can be accelerated and diversified

Technology is making it easier to promote your brand

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Few have done well

+ For all the press and coverage, only a few success stories exist They are all new entrants to the intermediary retail space

+ Dimensional could no longer ignore the grass-roots demand from the retail market

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Institutional brands matter

Source: MF Wire

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Institutional organizations are already institutional

+ Institutional organizations are already better staffed and trained to handle institutional-like queries Biggest challenge is the gross sales mentality of traditional retail organizations

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Consolidation creates quality and capacity+ Growth of institutional outsourcing is upping demands and talent of institutional teams+ Fewer accounts to service can free extra capacity for retail focus

Source: Casey Quirk Investments Outsourcing Survey 2008

Global Implications of Institutionalization + Most of the traditional distribution infrastructure is not optimized against opportunity

26 Source: kasina, Distribution Summit, 2008

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Mergers create single point of entry+ As mergers continue to evolve, institutionalization is becoming a clearer ally to global growth

Source: kasina, Distribution Summit, 2008

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Regional footprints are cross-channel+ Institutional resources are being deployed first in a region with retail endgames in

mind

But no matter where the investor is, the firm has tried to stay true to a simple mission: to help investors reach their objectives by being the highest-value provider of investment services

-- Bill McNabb

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Your audience is growing … and listening online+ LinkedIn attracts more profitable advisors than average asset manager Web

sites and their own firm intranets “Banned” sites like Facebook and Twitter are up and coming and are likely to increase with

a more mature regulatory environment

Source: What Advisors Do Online 2009, kasina

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Technology makes it easier to build a brand

+ Some of the best are just starting their efforts

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There are significant reasons to act today+ Institutional organizations are well-positioned to capitalize on this

opportunity

Retail organizations are trying to do what you do

Global and internationalization efforts can be accelerated and diversified

Technology is making it easier to promote your brand

Closing

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Anyone recognize?

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“None of the songs were suitable for commercial release”+ Traditional distribution channels failed Wilco and the public

Yankee Hotel Foxtrot went Gold

Wilco has gone on to sell over a million records and continually sells out shows

+ The public became educated and thirsty for good music and was willing to find it Brands matter and can be created by musicians small and large

Technology was a critical component to success

Source: http://en.wikipedia.org/wiki/Yankee_Hotel_Foxtrot

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Thirsty for new ideas, and willing to work for them+ The institutionalized retail channel is open to new ideas and ready

to seek them out

Retail and institutional channels are merging

Traditional retail channels are struggling to match the demand

Institutional organizations are well positioned to capitalize on this opportunity

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Thank You.For more information, please contact:

581 Avenue of the Americas, 5th FlNew York, NY 10011

Mike MaPrincipal

e-mail: mwma@kasina.comphone: +1 646 257 4470fax: +1 212 349 7413

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