Take our big ‘A’ advice, BDMs earn their keep

I remember, when discretionary master trusts were becoming popular in the mid-nineties, business development managers (BDMs) employed by fund managers were concerned about their future. They thought the move to wholesale funds, thus reducing the fund mangers’ margins, would cost them their jobs.

Well, they survived and are now in more demand than ever. I believe the starting salary (including bonus) for BDMs is about $100,000, with good ones easily earning $200,000 plus. BDMs no longer worry or wonder about their future.

Now they wonder how the dealers and advisers who predominantly use wholesale funds in wraps or master trusts can still want the same support and handouts they use to get when they used retail products. They say the margins of old are now not there to support the largesse of old.

In reality, however, they should be thankful that dealers and advisers still want the same handouts and support. Most people in this industry reckon they know a lot about modern portfolio theory, but those that are (and will be) successful are those that know about (modern) marketing theory - and implement it.

We are in an industry where investment product supply exceeds demand, and the product is becoming rapidly commoditised. How many fund managers are there? How many collective investments are there?

The product itself also has unique distribution - no manufacture, no warehousing, no physical distribution and never any shortage of stock. So how do you sell a product that is a commodity for which there is excess supply? With difficulty.

To further complicate matters, the industry and the intermediaries (through which most of the product is sold) is going through unprecedented change. This change is being brought about, in part, by: the regulators, IT, globalisation, growing demand and consumerism.

These will all affect the way investment products are sold or, more importantly, distributed. I am not talking about the Internet here, but how fund managers distribute their products through intermediaries.

These changes, I believe, will cause the demise of the boutique dealer. It will also lead to greater control by dealers over their proper authority holders and will change the adviser's role. To these you can add the fragmentation of distribution and the buyer (in this case the intermediary) being more demanding and having more choice.

What does this mean for the BDM? It means their role is becoming more important, is changing and will be harder. Although this article focuses on BDMs and distribution of investment product through intermediaries, most of the points are relevant to dealers and advisers. Unfortunately, many advisers do not see themselves in the distribution business.

One day, not very far away, there will be an overabundance of advisers where supply will exceed demand.

CLERP 6 will require dealers more control over advisers. In my last column (Money Management, 1 April) I outlined how I thought the implementation of CLERP 6 would lead to the demise of the boutique dealer and why the dealer would need more control over their advisers. The use of wraps and master trusts will help facilitate this control.

These changes, with the others mentioned above, will transform the role of the adviser.

The adviser will become more of a relationship manager than the technician he or she is today.

There will also be the commoditisation of small (a)dvice - as opposed to big (A)dvice. Small (a)dvice is product selection, asset allocation and portfolio optimisation. There are a number of software programs being released this year that will facilitate this, and the FPG/Morningstar 'star' research is attempting some of this.

Big (A)dvice is about understanding the client, turning information into insights and educating the client. This big (A)dvice relationship manager adviser is essential because most people want to relate to other people (even the validators) and because of what I call the "X" factor.

In the past, many BDMs have focussed on advisers as the way to influence not only dealer's but also the adviser's product selection from the approved list.

How will this changing role of the adviser affect how the BDM does her/his job? Does the paraplanner now get their attention? Maybe so, maybe not. It will depend on how the particular dealer group is structured. For some paraplanning will be centralised, for others it will be in the adviser's office.

Distribution is fragmenting. There are now many more intermediated channels. These include banks, insurance companies, insurance agents, accountants, dealer networks, boutique dealers, stockbrokers, private banking, superannuation fund trustees, actuaries/fund administrators, cooperatives and direct wraps. Each of the channels will operate in different ways and have different needs. There will also be differences within channels. Some will be very centralised and regimented; some will rely on software; some will outsource a lot of their functions; and some will not change.

Intermediaries now have more choice not only of product but how they buy product.

There is retail, wholesale, fund of funds, mandates, portfolios of shares and listed securities. Also, soon they will be able to access overseas collective investments and listed securities directly. So how do you sell a product that is both a commodity and in excess supply into a market where roles are changing, fragmentation is increasing and choice is growing? As I said earlier - with difficulty.

Fund managers are trying a variety of marketing strategies. These include innovative products, smart packaging, adviser-friendly cash management trusts, corporate superannuation leads, premier adviser status, overseas research trips, tempting commissions and business advice and support. Some even resort to providing good administration and service, while the really desperate rely on performance.

For the reasons I have outlined above, fund managers will continue to use these strategies and more. However, their implementation will have to be modified to suit the changing environment.

Ah! I can hear some people saying, but financial planning is becoming a profession and a lot of the above strategies are not suitable for a professional. I disagree. Firstly, I would say that advisers attaining CFP status are not becoming saints - they still want and seek support from fund managers. (Having been once sued for libel I won't continue.)

Secondly, our industry (profession) is no different than most other industries/ professions, for example the medical profession. Solicitors and accountants, in the main, only have advice to offer, whereas advisers and doctors offer advice and product.

The marketing strategies used by drug companies on doctors would make fund managers look like rank amateurs. This is another industry where supply exceeds demand and there are always new products to promote. And who spearheads the marketing strategies for the drug companies? None other than the drug reps (aka BDMs).

Good BDMs are essential to the success of a fund manager, and as I said earlier their job is changing and becoming more difficult. It is important because often they are the face of the fund manager. This is a relationship business. It is about long-term relationships - through the good and the bad.

People like dealing with people, especially ones they like and respect. The role is changing - no longer will long lunch Larry succeed. The role of the BDM is being segmented. Many fund managers have specialist or senior BDMs to service the key dealer groups and researchers. Some do not have their BDMs doing the more menial tasks such as delivering a prospectus.

The role is now more difficult as the BDM is expected to be technically competent.

Some fund managers have tried to use ex-researchers, but in the main this has not worked because they have not had the interpersonal and marketing skills required. The BDM needs to be more sensitive to the clients' needs and tailor his or her support and service to the particular needs of the client.

The reality is that even with reduced margins, fund managers know they can not skimp on marketing. All they can hope to do is focus it better. Dealers and advisers know it is a buyer's market and they will take advantage of it. So, everyone should accept that the handouts, soft dollar deals and inducements will continue. It can't be banned but it should be disclosed.