The average annual redemption rate for a mutual fund is approximately 30%, which means you wake up every January 1st and realize that you will lose 30% of your assets in the next 12 months. We can have an intellectual discussion that this number needs to be lower, and this is the reason that there is a difference between “investment” returns versus “investor” returns – but it is a pointless discussion. You still wake up every January 1st and try to best navigate around that 30%. Given this, we need to stop discussing redemptions with our sales folks. Why?
Can you control redemptions?
Not really. It took me decades to come to this conclusion, but the reality is that sales folks have little to no influence on money leaving. Just ask yourself, “why do people redeem?” Poor performance, Yes. Client needs the money, Yes. Client’s goals change, Yes. Financial Advisor’s market outlook changes, Yes. A better investment option is considered, Yes. Do you control any of these issues? NO. Are your relationships so strong that they will override a Financial Advisor’s desire to redeem? Probably not. Are you willing to sacrifice your relationships by getting upset at someone for redeeming? Hopefully not.
So now what?
Asset managers need to be more focused on filling that inevitable 30% hole. Stop beating-up your sales folks on redemptions and start incentivizing them to sell more. This is one of the disconnects that exists between management and sales teams. While it is understandable that management focuses on the net number (that’s how they get paid), it is unfair to impose a redemption component on a sales team’s compensation given it isn’t something they can control. While short-term “claw-backs” are understandable, it really doesn’t make sense to impose a net sales component in an effort to drive behavior. Can portfolio managers control the market’s movements? No. This is why most of the top- tier shops pay their PMs based on the alpha they generate. Why not apply this model to your sales folks? Have them focus their activities on the things they can control to generate more sales. Most distribution shops don’t like to have this discussion because it causes them to realize how little they actually control when trying to retain assets.
Remember, you are just renting client assets, and the goal is to extend the lease payments as long as possible. The average holding period for a mutual fund is approximately three years. If the product performs well, and as expected from a positioning standpoint, you will enjoy a longer lease. We can have theoretical conversations about “did you properly manage their expectations?” or “every product experiences underperformance” – but it doesn’t minimize the inevitable 30% hole. Given this, then why have your sales folks focus on redemptions at all.
I am not suggesting that a wholesaler should simply sell a product and then “walk away” because you should never treat it as a one-time transaction. You build sustainable relationships by correctly positioning strategies and managing expectations along the course of the product cycle. BUT, crappy performance will always trump a durable relationship when it comes to redemptions. When a noticeable redemption occurs, the wholesaler should reach out to the Advisor and ask why they redeemed. Almost always, the answer will be something that was out of their control. They should relay this message back to management because it will only reinforce that the redemption was no fault of the wholesaler. Conversely, management needs to start placing a higher priority (via compensation) on which activities drive to fill the 30% gap. And if you want to drive specific behavior, then compensation tends to be the best motivator. And remember, positive reinforcement is much better than negative reinforcement. For example, pay more on new producers, pay more on FAs that use multiple products within your fund family, pay more when they sell more. Just stop thinking you can manage something you can’t control.