Retail and the lost art of selling (part 1)

For a prospective customer, there’s nothing like seeing a product firsthand.

Chatting recently with an ex- Head of Retail, he recounted a 1990s initiative to
charter a light plane to fly half a dozen financial planners to Western Australia to
visit a remote mine owned by a resources company their funds had invested in.
If you want to communicate investment principles, it’s hard to beat hearing
management on-site talking about their vision, while wearing King Gee overalls
and covered in a thin layer of red dust.

But as an industry, we seem increasingly remote from our customers, and have
lost the ability to tell the stories which resonate with them.

When you buy a managed fund you are buying the hope that the fund manager has
the skill and experience to protect and grow your capital. For many investors and
their financial planners, hope has become a diminishing commodity. While market
volatility has played a major part, the retail product distribution system should
share the blame.

Not long ago it was common for fund managers to have direct channels, as did my
last employer, Rothschild, or even retail shopfronts, such as BTFG had in Martin Place
in Sydney. Most of those have gone. Yes, the economics of the direct channel were
tough. But they had the benefit of direct contact with end customers – which was lost
as direct channels were scaled back or shut down entirely.

The retail industry laid most of its distribution bets on the planner and platform channel. And before most managed funds get anywhere near the desk of a financial planner, they have to go through a long and rigorous evaluation process:

Step Stage Summary
1 3 year track record A fund’s journey to the desk of a planner begins with at least a 3 year track record of solid returns relative to their benchmark.
2 Researcher ratings Step 2 involves obtaining a rating by at least two rating houses, such as Lonsec, S&P and van Eyk. Researchers – often CFA qualified and
possessing a firm belief in the science of portfolio management – must be convinced quantitatively and qualitatively to allocate a favourable
rating.
3 Platform shelf space Now armed with performance and a positive rating, a BDM can seek ‘shelf space’ on the major platforms. In addition to commercial negotiations,
the fund has to pass through another quantitative and qualitative evaluation.
4 Dealer group APLs The fourth, and perhaps most important, step involves getting the product placed on Approved Product Lists (APL), and ideally within model
portfolios of major dealer groups. Generally the fund must go undergo a third round of rigorous quantitative and qualitative evaluation.

To successfully navigate this process, a BDM has to devote much of their time to greasing the cogs of the evaluation machine. As a result, they increasingly resemble the researchers they are trying to win over. It’s perhaps not surprising that the value propositions of most funds have become narrow and quantitative based (eg outperformance of the S&P ASX 200 with a 3-4% tracking error) as a result.

Furthermore, BDMs have less and less contact time with the financial planners who ultimately recommend their products, and many have zero contact with the end clients who actually invest. Along that road, we became removed from developing the stories that will ultimately resonate with retail investors and their advisers.

The meteoric rise of SMSFs and some of the broader challenges faced by the industry can be partly explained by a lack of understanding and belief in what we are selling, and our inability to successfully communicate it. When the world appears to be falling apart, the need to pass the BBQ or elevator pitch test becomes even more important.

In Part 2 next week, we’ll look at some of the changes in customers, channels and technology which make the art of story-telling and selling an essential one to recover – and some ideas about how to do it.

Posted In: Trialogue