Are there any mutual fund companies in POSITIVE net sales? Seriously, anyone? Throughout 2023, I talked with dozens of sales folks, and not one of them was in net sales. I am not sure I would feel too comfortable heading into 2024 representing open-end, actively managed mutual funds. The prospects are bleak, and the “trend line” is horrible. How do you wake up every morning and stay motivated, knowing that your livelihood depends on something no one wants?
Per ICI data, open-end mutual funds were in net redemptions of over $100 billion over THE LAST FIVE WEEKS. This occurred during one of our generation’s most significant bull market rallies. For comparison purposes, State Street had positive net flows of over $50 billion during THE LAST FOUR WEEKS – just State Street.
So, is active management dead? No! But the delivery mechanism is DOA. Sorry, but it is a foregone conclusion. You can find a Fund with positive flows here and there, but you cannot ignore the trend. Furthermore, if you work for a Fund company that continues to roll out new mutual funds, you might ask yourself, “Why are you rearranging the deck chairs on the Titanic?”
Hopefully, your shop has seen the pivot and has an ETF platform they can leverage. There are lots of very cool ETFs that would be tremendously fun to sell. Virtus has PFFA, which incorporates leverage on Preferred Equities and has a desirable yield. Van Eck has BIZD which invests in Business Development Companies (BDCs) and has an excellent yield and no K-1. With ETFs, there is always the issue of tracking sales, which is a constant complaint I hear from wholesalers. Asset Managers will eventually figure out a solution OR move away from the traditional commission structure and offer compensation based on activities and overall flows.
If I were heading up an asset management shop, I would rethink the entire distribution and commission structure. I would pivot away from mutual funds and focus my attention on ETFs. How would I do this?
- Initially, I would ask wholesalers to spend 75% of their time on ETFs and the remainder on Mutual Funds. The goal would be to become an ALL ETF focus firm by the end of 2024.
- I would track all of this activity on my CRM system and slowly phase out my Mutual Fund Commission structure.
- I would increase the wholesaler’s base salaries (to $150,000) and offer quarterly discretionary bonuses based on activities and priorities (given I can’t track sales).
- While this might seem like a massive culture shift in incentivizing sales folks, the industry needs to recognize the changes occurring, along with the demand shifts in how products are packaged and delivered.
- I would do everything I could to convert my Mutual Funds to ETFs. Since 2021, over 70 mutual funds have converted to ETFs, so it can be done.Implementing this plan, with the ultimate goal of being an ETF shop, would take around two years.
It will cause lots of discomfort amongst sales folks, given the traditional commission mindset, and they will either see the light or move on (so be it). I would want my wholesalers to be of the mindset that they will have a more stable income pathway based on activities rather than the traditional “eat what you kill” mentality. The goal would be to create better alignment on how Financial Advisors want their investment strategies packaged.
RIP mutual funds…you had a great run.