I was asked to write an opinion piece for Ignites Asia (A Financial Times Service) on whether Nomura’s exit from the open-ended mutual fund is the start of a trend in the Asian asset management business or an isolated incident. I believe that it’s an isolated incident and that growth opportunities still exist. To quote from the article:

“Nomura Asset Management (Nomura AM) had a number of things going against it when it entered the U.S. in 2008, as it:

• Entered just before the fall of Lehman Brothers and the onset of the financial crisis
• Overestimated the awareness and marketability of its name
• Failed to make the necessary investment in distribution and
• Chose to concentrate its offerings in the open-end mutual fund business rather than in alternatives such as exchange-traded funds. (It is continuing to operate two closed-end funds.)

I would find it hard to see any firm succeeding when faced with all those impediments. Some of the impediments were out of the firm’s control, such as the financial crisis, while others were certainly avoidable. And therein lies the lesson. I am not saying that it is easy to enter or succeed in the highly competitive U.S. mutual fund market or even Europe’s retail fund market. But there are still opportunities if firms enter the market with their eyes wide open, have a long-term time frame and have a sound distribution strategy.

Below are some of the key factors that will have the biggest influence on whether or not a firm succeeds outside the Asia-Pacific region.

Distribution – A key decision to be made upfront concerns whether asset managers are going to go it alone in distribution or partner with a more established firm in the given territory. There are, for example, opportunities to subadvise funds with proven distribution power as an alternative to putting the asset manager’s own network together in a foreign region.

Product choice – There will always be opportunities; managers just have to give the market what it wants. Nomura AM’s decision to primarily offer open-end mutual funds, particularly when any market observer could see the growth trend was in ETFs [exchange-traded funds], was in retrospect a mistake.

Patience – Especially if asset managers decide to go it alone on the distribution side, they must be patient in the best of times, let alone in the midst of a crisis and recovery.

Performance – I haven’t mentioned performance yet, but obviously you have to have good performance with a solid track record. I don’t believe performance is what caused Nomura AM to fail in this case. I hate to put it this way, but there are plenty of poor-performing funds out there that have amassed significant assets.

All in all, for all of the reasons cited above, I don’t see Nomura AM pulling out of the U.S. open-end mutual fund market as a signal of a change in the Asian asset management business. Instead, it should be looked at as a failed strategy on Nomura AM’s part coupled with bad timing and perhaps a tinge of impatience. Others should not take this move as an indication that the U.S. markets, or other foreign developed marketers, are over-saturated or too mature to explore. One can find promise in comments made by Nikko Asset Management’s CEO, Tokyo-based Charles Beazley, after news emerged about Nomura’s departure. Beazley told Ignites Asia that his firm is “extremely happy” today with its place in the North American market.

Nomura AM’s experience should be a wake-up call to other Asian firms wanting to enter the U.S. markets and should offer some guidance on what to do – and not to do – to be successful.”

Only time will tell.

Recent studies by two research firms confirm that the growth trend in retail investment alternatives is poised to continue:

• Cerulli Associates predicts that alternative mutual funds will represent 14% of the industry’s assets in the next 10 years, up from the current 2%; and
• Strategic Insights expects liquid alternatives to reach $490 billion by 2018, up from $237 billion at the end of August.

Those surveyed include managers, investors, advisors and industry executives. Cerulli also found that 25% of advisors they spoke to plan to increase their allocation to alternatives. What the implications of this growth?

The Good – investors will have more of a variety of funds from which to choose. Presumably, as the growth in retail alternative investments continues, so will the education process, of both advisors and investors, as will transparency. But I have commented before that I am worried about the growth of alternative investments in the retail space, because many investors have no idea what they are actually investing in. Advisors are also at risk if they don’t take the time to truly explain how hedges fit into a portfolio.

The Bad – while assets are forecast to increase significantly over time, up until now the proliferation of new funds has outpaced this growth. In 2012, for example, 101 alternative mutual funds were launched. While this number has abated this far, to around 30, I fear that this could be an example of the industry creating the demand – rather than the demand leading to product development. Some industry executives already see an alternatives fatigue setting in.

The Ugly – this trend proves to be the next bubble and further deteriorates investor confidence in advisors and the industry as a whole. The ugly word “derivatives” comes to mind – is the product development world getting ahead of itself again in creating innovate products that investors (and advisors) don’t really understand and may not truly need? Will investors balk when their hedged portfolios underperform in years such as 2013 and they fire their advisors, without ever giving their portfolios the opportunity to outperform in down markets?

My hope is that the many mistakes of the past will not be repeated, and that I am being overcautious. My fear is that I am right.

What do you think?

Advisors constantly struggle with the question of how to price their services. Rarely do you go to an attorney or physician who offers to discount their fees; so why should advisors? The answer is quite simple – they shouldn’t. But underlying this answer is the assumption that the advisor has clearly articulated his/her value added from the beginning of the relationship and follows through as the relationship develops.

This concept is often referred to as pricing your value. For example, should fee-based business be priced differently than commission business (for “hybrid” clients) that utilize both services? The answer depends on what services you are providing. If commission clients are getting many of the same services – such as asset allocation advice and quarterly reporting – on that portion of their business, the answer is yes; if they are not, the answer is no.

PriceMetrix, a leading industry pricing service and think tank know for the quality and depth of their research, recently released a study on whether or not advisors price the fee-based and commission portions of their hybrids differently – is one discounted as a loss leader for the other? The results showed that the answer is basically no – most advisors show consistency in pricing – either higher or lower than average; only 21% of advisors seemed to price the two kinds of services differently.

(The study included data from hybrid households with investment assets between $500,000 and $1 million and come from the PriceMetrix database that includes nearly 500 million transactions and over $3.5 trillion in assets.)

These results are encouraging in that they hopefully reflect that advisors are consciously deciding that they are worth their fee, regardless of the type of transaction. In the event that these results are just a coincidence, it’s worth mentioning a few golden rules of pricing:

• Advisors should clearly articulate to new clients their value added proposition and casually remind them of their commitment and follow through on an on-going basis;
• Fees and how they are earned and charged should be discussed upfront – if clients have to bring up fees before you do, you are probably going to be on the defensive for the duration of the relationship; and
• The type of investment – fee-based v. commission – should be irrelevant in pricing because you want to be seen as a solution provider rather than simply an order taker.

I’ve read a number of interesting articles/reports lately that merit a mention – and could help lead to business-building ideas.

1) Referrals – a recent study by Prudential about referrals indicates that while clients think it takes 4.8 years on average to build up enough trust to make referrals, most advisors think that such trust is built in half of the time – just over two years. Perhaps advisors need to be a little more patient! The good news, however, is that while clients believe that referrals have a lot of social risk, more than half of the people surveyed have made referrals, and another third said that they would.

2) Fee-based compensation – According to Cogent Research LLC, two-thirds of industrywide compensation will come from asset-based fees by 2015, up from 59% today. The study included 1,700 financial advisors with an average of just over $100 million under management. The likely biggest loser from this continuing and growing trend – actively managed mutual funds.

3) Advisors too focused on baby boomers – a recent Cerulli Associates report (conducted in conjunction with Phoenix Marketing International) warned that advisors are focusing too much of their time on baby boomers, just at the time when these investors are going to be retiring and entering the spend-down phase of their lives. Simultaneously, fewer than 20% of investors under the age of 40 feel that they are getting enough attention. Advisors, by ignoring these younger investors, could miss out not only from the growth in assets of these investors as they become more successful, bus also from the more than $2,3 trillion in investible assets estimated to be transferred via inheritance between 2026 and 2030.

4) Wirehouses face continued threat from RIAs – the Aite Group, in a new report, indicates that independent shops and discount brokers should continue to benefit from their ability to tailor customer experiences more easily than wirehouse advisors. While there is no denying the continued growth in market share of wirehouse competitors, I for one still believe that a wirehouse advisor can be successful and create a very good client experience – they just have to work a little harder at it! (According to the story, RIAs boosted assets last year by 18.2%, discount brokers by 12% and the wirehouses by 8.2%.)