The Challenge Of Selling A Managed Fund
I have a friend who is starting a funds management business. I joked with him that, in order to market to investors, he should say that he is a long-only value investor that believes in Warren Buffet, only holds high quality stocks for the long term, real money is made in the holding, lower prices are simply an opportunity to buy more, and the ideal holding period is forever.
Of course, I’ve just described every funds management organisation in existence – therein lies the joke.
Almost every fund manager I know of has had occasional struggles with “distribution”, which I define as “getting people to invest in my fund”. It is, simply put, very hard to sell a differentiated long-only value investing fund, which is why so much of the industry revolves around controlling distribution and advisor networks.
Selling a “1 & 10”, long only, value investing managed fund on its own merits and differentiating it from thousands of similar funds is even more difficult on the ASX because the market is so small that you invariably wind up owning the same stocks as many other managers. This makes it hard for investors to differentiate between funds based on strategy, given similar portfolio construction. In one way or another, many fund management businesses turn to marketing ploys, such as “ethical” funds or “China” funds to differentiate their offering and grow FUM.
About 18 months ago I wrote on this topic at length , but ultimately ended up pulling the post down because it was unsatisfying and did not really hone in on the driving factor of what sells a funds management business. I want to revisit the topic because I am sure that there must be a formula for marketing a fund that does not involve either becoming a prominent key man figure, controlling FUM flows, or telling lies to unsophisticated investors.
I have two new perspectives that I want to bring to the table for another attempt. This article necessarily focuses mostly around the problem of selling a small funds management offering. I have not spoken to distribution or managers at the large fund houses such as IOOF, Perpetual, or Platinum, so I don’t know what the experience looks like over there.
Malcolm Gladwell in his book Tipping Point refers to a problem of what he refers to as “stickiness” – ensuring that the message becomes actionable to the customer. Below is a concise example from his book. I have paraphrased heavily for brevity, but the text is as in the original:
Consider, for example, the so-called fear experiments conducted by the social psychologist Howard Levanthal (who) wanted to see if he could persuade a group of college seniors at Yale University to get a tetanus shot. He… gave all of them a seven-page booklet explaining the dangers of tetanus, the importance of inoculation, and the fact that the university was offering free tetanus shots at the campus health center. Some of the students were given a “high fear” version, which… included color photographs of a child having a tetanus seizure and others… with urinary catheters, tracheotomy wounds, and nasal tubes. In the “low fear” version, the language describing the risks of tetanus was toned down, and the photographs were omitted. When they were given a questionnaire later, all the students appeared to be well educated about the dangers of tetanus. But those who were given the high-fear booklet were more convinced of the dangers of tetanus, more convinced of the importance of shots, and were more likely to say that they intended to get inoculated.
All of those differences evaporated, however, when Levanthal looked at how many of the students actually went and got a shot. One month after the experiments, almost none of the subjects — a mere 3 percent — had actually gone to the health center to get inoculated. Why?
…when Levanthal redid the experiment, one small change was sufficient to tip the vaccination rate up to 28 percent. It was simply including a map of the campus, with the university health building circled and the times that shots were available clearly listed. There are two interesting results of this study. The first is that of the 28 percent who got inoculated, an equal number were from the high-fear and the low-fear group. Whatever extra persuasive muscle was found in the highfear booklet was clearly irrelevant. The students knew, without seeing gory pictures, what the dangers of tetanus were, and what they ought to be doing. The second interesting thing is that, of course, as seniors they must have already known where the health center was, and doubtless had visited it several times already. It is doubtful that any of them would ever actually have used the map.
In other words, what the tetanus intervention needed in order to tip was not an avalanche of new or additional information. What it needed was a subtle but significant change in presentation. The students needed to know how to fit the tetanus stuff into their lives; the addition of the map and the times when the shots were available shifted the booklet from an abstract lesson in medical risk — a lesson no different from the countless other academic lessons they had received over their academic career — to a practical and personal piece of medical advice. And once the advice became practical and personal, it became memorable.
He is right. But I mentally think of the same concept in a different way. All of the students already had all of the information they needed to make a decision. What they had not done was create a link between “tetanus is dangerous” and “you can get free tetanus shots”. What needed to happen was to create some sort of state where the two separate pieces of information were linked in a way that caused the student to take action, i.e: “this is a problem for me and I will solve it by getting vaccinated”. Maybe this was done by providing a map. Maybe it could have been done another way. But the mental link needed to be created.
I think this the correct way to think about a sales process. In my mind there are three conceptual aspects to any sale. First is the “I have a problem” (tetanus is dangerous) status of the customer. Second is the sales and product aspect “you can buy our product to solve your problem” (vaccinations).
The first is easy – people always have problems to solve. The second is difficult but not impossible; by listening to the customer and knowing your business it is possible to create a good product (that solves a problem) and a good sales process (that makes the product buyable). People need good investment managers, and most fund management businesses have at least a passable product that is sold reasonably well and is therefore purchasable.
The third and most overlooked aspect is getting the customer to take action – the actual purchase event. There needs to be buy-in from the user. Regardless of how good the product and sales approach is, the target customer actually needs to reach out their hand to grab your product. They need to sign up for your newsletter, or lift your product off the shelf, or….fill out your forms and send you money.
Yes, you can make the sales approach much more efficient. You can also make the purchase process (once the customer has evinced interest in the product) much more efficient by streamlining the forms to be filled out and similar. But what is extremely difficult to do, and key to the whole process, is to turn a cold/warm lead into a hot one, triggering the moment where the customer, in their mind’s eye, sees themselves investing in your fund.
Product <–> Connection <–> Customer
It’s relatively easy to refine a sales pitch and quite difficult to make the customer reach out and grab your product, especially in something that cannot easily be impulse-sold, like a large investment in a managed fund. That will not stop fund managers using excitement and tales of huge winners to generate interest; excitement is perhaps the oldest tool in sales. Nonetheless, it is a blunt instrument and prone to backfiring; excitement can come at the cost of authenticity.
In my anecdotal observations, fund pitches are well practiced and the fund managers themselves are typically good storytellers, so the sales pitch is strong. The professionals are capable, confident and knowledgeable. The investment approach makes sense – the product is credible. The hard part is always getting the customer over the line to say yes. I’m told that, if successful, it takes around 6-7 touch points (meetings, pitches, phone calls) to get a multi-million dollar commitment.
Assuming a reasonable quality product, the problem lies not in making people want the investment product (tetanus shot), it’s in making them actually commit (go and get an injection). That’s my first insight, if you can call it that.
The second insight, remembering that I am talking about small funds, is that I think a common approach to selling a fund misses the mark in a few small but crucial ways. The sales process tends to focus on what people say they want, rather than what problems they actually experience.
People like franking credits and dividends? Better advertise our dividend.
People don’t like discounts to NTA on listed vehicles? We can set up a system to buy investors back at NTA after certain criteria are met.
Ethical investing is getting a lot of airtime? Let’s launch an ethical fund to grow our FUM.
Some of these are problems that I think don’t really exist. Investors like franking credits and dividends, sure, but I suspect the core problems that investors are trying to solve with a managed fund are not the franking credits or the ethical aspect.
When investors are focused on franking credits, what they are really saying is “I need to generate a yield of at least X after tax”. When they look at ethics I think sometimes what they are really saying is “I don’t want to invest in losing industries like coal”.
Here is an example list of problems that I think investors might want to solve:
- I need to earn a certain rate of return to grow my investments (or maintain my retirement)
- I need to generate a certain income yield on my investment
- I can’t handle a portfolio that drops in value by more than 20% at any time
- I need a reliable source of returns over the long term
- I want to get international diversification without sacrificing returns (vis a vis franking credits / low benchmarks)
- I need somebody that is trustworthy and competent that will look after my money diligently
- I need somebody who is authentic and is not just selling me a good line to get my money
- I need somebody I can talk to, to get advice on what I should be doing with my investments
By solving some or all of these problems, by directly speaking to the things that people are worried about, the fund gets that much closer to making a personal connection to the customer, and correspondingly that much closer to a sale. (When it comes to making the sale, a related factor that I think is critical is authenticity, which I am convinced is required in order to create a saleable fund and attract loyal FUM. However, this must be addressed at further length at a later date).
It becomes more complex once the role of advisors and asset consultants is taken into account. On an advisor level (think of them as an aggregator of retail and HNW money) the decision can still be made on a personal level because the advisor can meet with the manager. An advisor that knows manager John Smith may also back the manager’s new venture because of personal trust, even if the new fund is not directly managed by John.
Asset consultants in theory should take all of the personal decisions out of the mix, because they operate with strict criteria. In practice there is probably still some personal influence as well as some cases where bad decisions get made due to inflexible criteria.
Still, with every type of financial product, the approach should be the same.
What problems are the customers (investor/advisor/consultant) really worried about?
How does our fund solve these problems?
How do we get to the point where a customer wants to, with minimal prompting, reach out and grab our product?
A small fund manager has something like five jobs. They are chief investment officer, chief compliance officer, chief marketing officer, CEO of the funds management business, and Chief Personnel Manager to boot. By definition they cannot be expert at all of them because the time requirements are too large and because the usual career path of a fund manager does not grant experience in all of those roles.
There are too many competing demands for time for the small manager to be good at everything. I think an unintended side effect of this is that many funds don’t systematise the process of solving problems for clients when creating new investment products.
Maybe they should.
I have no investment in, nor relationship with, any firm mentioned. I do not work in funds management or fund sales. I may have some money in these firms via my superannuation fund which I am not aware of. This is a disclosure and not a recommendation.