The lessons of a decade of fund choice in the US

In less than a fortnight, the first conference to combine wholesale and retail financial services kicks off in Melbourne. Two of the IFSA conference's keynote speakers spoke exclusively with Money Management.

In less than a fortnight, the first conference to combine wholesale and retail financial services kicks off in Melbourne. Two of the IFSA conference's keynote speakers spoke exclusively with Money Management.

Financial services groups can expect a totally different operating landscape un-der an investment choice superannuation regime, if the US experience is anything to go by.

After more than 10 years under the 401(k) pension system in the US, formerly dominant players in financial services have been reduced to also-rans in com-parison with the giants of the industry such as Fidelity, Vanguard and Putnam.

And a person who has observed the changing of the guard keenly, Morningstar chief executive Don Phillips reckons the pace of change is accelerating.

Phillips says the fund managers that have reaped the benefits are those that have invested in building up IT infrastructure and developing brand awareness.

"It has become a very capital intensive business. Fidelity, for example, in-vested more than $100 million on information technology to build up its share of the 401(k) market."

"Fund managers wanting to make it in the 401(k) market realised they had to be in the distribution business, not just manufacturing. Fidelity's Ned Johnson said: 'It's better to be in the movie distribution business than the movie busi-ness'."

And businesses such as Fidelity have reaped the rewards from these strategic in-vestments. Fidelity is the biggest player in the 401(k) market and the largest fund manager in the US.

However, Australian advisers looking to prosper in the post superannuation choice environment should take heed of the US experience, where advisers have failed to grab a significant foothold in the 401(k) market.

Phillips says there are "clearly opportunities" for financial planners in the US market, there are a number of obstacles standing in the way, not least of which is the public's perception of financial planners.

"A lot of employers are absolutely terrified to bring in financial planners largely due to fiduciary issues," he says.

"There is a lingering image of brokers cold calling to drive their sales busi-ness. At the same time, there is a huge need for financial planning as employees need advice when drawing up their pension plan."

Many Australian financial planners are targeting small to medium sized enter-prises (SMEs) who are outsourcing their superannuation functions en masse. Many of our biggest fund managers support this strategy.

But in the US, one of the most successful players in the SME market has been BT Funds Management's new parent Principal Financial Services.

"Principal made a shrewd move when it decided to direct its efforts toward small to medium sized plans. While the larger fund managers battled it out for the bigger companies, Principal quietly signed up a number of the smaller plans. By the time the big end of town became a mature market and larger fund managers started to look elsewhere, Principal had already built a strong position."

And US fund managers now regard the 401(k) market as a more profitable business than the traditional retail market.

"Retirement assets make up roughly 35 per cent of the US fund industry's assets today," Phillips says.

"As these accounts are more heavily weighted in equities than the industry as a whole, they represent a particularly profitable and attractive segment of the market.

"Moreover, these assets are viewed to be stickier than those in taxable ac-counts. As retail sales ebb and flow, contributions to defined contribution plans provide a steady flow of assets."