Fund Sales via B/Ds and FAs Moving toward Fee-Based Model

May 5, 2009 ( - Sales of U.S. long-term mutual funds through brokers and financial advisers not only continued to shift towards fee-based compensation, but the trend towards fee-for-advice distribution accelerated during the financial crisis.

Those were the key takeaways from a new study by Strategic Insight, according to a news release.

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.

Not only that, the company said, the fund share classes tied to advice were the biggest growth areas in 2008. Altogether, these 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.

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. These proportional sales were very modestly below 2007’s aggregate sales results, showing the continuing importance of these channels.

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:

  • "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%. These shares also experienced the largest increase as a proportion of total sales in 2008 vs. 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. Survey participants managed in aggregate roughly half of industrywide U.S. open-end stock and bond fund assets as of the end of 2008, Strategic Insight said.