Company Press Release

NEW YORK, NY – May 5, 2009 – Sales of U.S. long-term mutual funds through brokers and financial advisors not only continued to shift towards fee-based compensation (and away from the long-established model of intermediaries being paid commissions at the point of sale), but the trend towards fee-for-advice distribution accelerated during the financial crisis, according to a new study by Strategic Insight.

Fee-based compensation models gained sales “market share” last year (especially in the fourth quarter), as fee-charging mutual fund wrap programs and fee-based Registered Investment Advisors (RIAs) were the two fastest-growing areas of fund sales in 2008.

In addition, the fund share classes tied to advice (because they carry no front-end sales loads) – No-Load share classes or traditional “A” shares where the loads have been waived – were the biggest growth areas in 2008. Altogether, these two categories of share classes accounting for a combined 62% of new fund sales via intermediaries last year among survey participants, up from 56% in 2007.

These findings come from SI’s recent report, “Perspectives on Intermediary Sales: Trends in Fund Sales by Distribution Channel and Share Class.” The study was based on a survey of virtually all the large companies that distribute primarily through financial advisors; survey participants managed in aggregate roughly half of industry-wide U.S. open-end stock and bond fund assets as of the end of 2008.

Some key findings related to sales channels:

Underscoring the changing dynamic of broker-dealer fund distribution, sales via mutual fund wrap/fee-based advisory programs increased as a percentage of total sales from 24% in 2007 to 27% in 2008; that trend was even more pronounced in 2008’s fourth quarter, as wrap/fee-based sales rose to 30% of total sales in that turbulent quarter.

The RIA category was the only standalone channel that grew as a proportion of total sales from 2007 to 2008, with a 1.3 percentage point gain in fund sales “market share.” Although still relatively small (8% of total sales), the RIA channel was the fastest-growing among our survey participants for the second straight year.

National broker-dealers and Independent/Regional broker-dealers together accounted for 54% of total sales of surveyed firms in 2008. These proportional sales were very modestly below 2007’s aggregate sales results, showing the continuing importance of these channels.

“This report shows that advice in the mutual fund business is increasingly provided through fee-based accounts,” said Strategic Insight research analyst Dennis Bowden, the report’s lead author.

“Even more telling is the fact that these trends accelerated during the fourth quarter of 2008, the height of market volatility. During that time, even more sales shifted to the channels and share classes offering fee-for-advice structures,” said Bowden. “The market turbulence of the past year has only increased mutual fund shareholders’ need for more structured financial advice.”

And not surprisingly, SI’s survey found that the fastest-growing share class structures last year were those that offered fees for advice rather than point-of-sales commissions:

“A” shares sold at NAV accounted for 60% of all “A” share sales of reporting firms in 2008, and spiked to 67% during Q4’08. That compares to 2007, when “A” shares at NAV accounted for 53% of all “A” share sales.

Sales via no-load share classes accounted for the highest proportion of total fund sales in 2008, at 33%. These shares also experienced the largest increase as a proportion of total sales in 2008 vs. 2007, rising 3.9 percentage points (from 29% of total fund sales in 2007). When comparing standalone Q4’08 to full-year 2007 figures, no-load shares spiked 8.3 percentage points to 37% of total fund sales.

“A” shares sold at 4% or higher commissions accounted for just 8% of total annual sales in 2008 among fund managers primarily selling through financial advisors, down from 11% in 2007. Even this low proportion was influenced by a handful of managers still relying more significantly on high commission “A” shares, as evidenced by the median firm in our survey garnering just 4% of total sales via these shares in 2008.

The demand for both no-load shares and “A” shares sold at NAV is playing a pivotal role in fund firms’ share class positioning. Our survey results show that virtually half of total no-load shares in 2008 were made into mutual fund wrap programs, along with an estimated 42% of total “A” at NAV sales. Both of these proportions increased in Q4’08.

“The financial service industry continues to move towards a culture of ‘advice and relationships’ often packaged with an assembled portfolio of investments,” said Loren Fox, SI senior research analyst and co-author of the report. “And the retirement of Baby Boomers, who will need more customized counseling on income-in-retirement, will only accelerate these trends going forward.”

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Now in its 22nd year, Strategic Insight is a well- respected research firm for the mutual fund and wealth management industry, providing clients with in-depth studies, consultation, and electronic decision support systems. Strategic Insight assists over 250 organizations worldwide, including the largest mutual fund management companies operating in the U.S. and the largest insurance companies serving the VA business. SI clients are responsible for about 90% of all U.S. mutual fund assets. Strategic Insight also helps over 60 of the world’s largest asset managers expand in Europe and Asia. For more information, visit our home at www.sionline.com.


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