Provision of Advice a Factor in Trend Toward Fee-based Compensation

May 28, 2008 (PLANSPONSOR.com) - Sales of U.S. mutual funds through brokers and financial advisers continue to shift towards fee-based compensation, and away from the traditional model of intermediaries being paid commissions at the point of sale, according to a new study by Strategic Insight.

In a press release, Strategic Insight said it found that in 2007 about 60% of new fund sales through intermediaries occurred without front-end sales loads, combining sales of either no-load share classes or traditional “A” shares where the loads have been waived (often because they are sold through 401(k) plans, in fund wraps or similar platforms, or through RIAs).

Among the “A” shares that are sold with point-of-sales commissions, the trend is away from “A” shares sold at a commission of 4% or more (representing just 6% of intermediary-distributed firms’ total fund sales in 2007).

Advice in the mutual fund business is increasingly provided through fee-based accounts, according to Strategic Insights. The press release said the survey found that the fastest-growing distribution channels last year were those that rely most on no-load and load-waived share classes, including:

  • Mutual fund “wrap” programs, which are a large part of broker-dealers’ shift from commission-based sales to fee-based “advice” accounts,
  • Fee-only Registered Investment Advisers: The RIA population is drawing advisers seeking fee-based business and independence and mutual fund management firms are putting more emphasis on reaching this audience, and
  • Investment-only Defined Contribution plans (IODC), where sales by intermediary-distributed fund firms rose 33% last year.

Strategic Insight said rapid growth occurred also in level-load shares (typically “C” share classes), which saw sales rise 26% last year, thanks to more financial advisers using these shares as a substitute for fee-based relationships.

“The financial service industry continues to move towards a culture of ‘advice and relationships’ often packaged with an assembled portfolio of investments,” said Avi Nachmany, Strategic Insight’s director of research, in the release. “And the retirement of Baby Boomers, who will need more customized counseling on income-in-retirement, will only accelerate these trends going forward.”

The findings are in Strategic Insight’s recent report, “Fund Managers Focusing on Intermediary Sales: Trends in the Use of Share Class Pricing and Distribution Channels.” The study was based on a survey of virtually all the large companies that distribute primarily through financial advisers which managed in aggregate 52% of industrywide U.S. open-end stock and bond fund assets as of the end of 2007.

More information is at www.sionline.com .

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