Proprietary Funds Consider Outside Sales Channels

Following Prudential Investment's lead, several of the nation's largest securities firms are searching for outside channels to sell proprietary funds.Prudential Investments, Merrill Lynch Asset Management, PaineWebber's Mitchell Hutchins Asset Management unit and American Express are all looking at distributing through others. Alternative channels include RIAs, banks, independent broker/dealers and

Following Prudential Investment's lead, several of the nation's largest securities firms are searching for outside channels to sell proprietary funds.

Prudential Investments, Merrill Lynch Asset Management, PaineWebber's Mitchell Hutchins Asset Management unit and American Express are all looking at distributing through others. Alternative channels include RIAs, banks, independent broker/dealers and regional brokerage firms (see January '99 RR, Page 24).

The trend is being driven by the realization that a captive distribution strategy hasn't worked--proprietary funds have consistently been losing market share (see chart).

"Every manufacturer in this business will sell through every distribution channel," predicts Louis Harvey, head of Boston-based Dalbar, a financial services research firm. "If I'm a manufacturer and want to grow assets, why would I tie my hands behind my back? It's just nuts."

According to an April 5 article in Forbes, the new president of Merrill Lynch Asset Management, Jeffrey Peek, is interested in using outside distribution channels. The firm was not able to make Peek available for an interview. A Merrill spokesperson declined to elaborate, but did tell RR that the Forbes article was accurate.

In Europe, Merrill already sells its Mercury Funds through banks, insurance companies and a toll-free telephone number. In Japan, the firm's funds are sold through competitors like Nomura Securities, according to Forbes.

Executives at other wirehouses are quietly hinting that such relationships may eventually become a reality. "Initially we're not targeting other wirehouses, because I don't really think that's something they're looking for right at the moment," says Beverly Moore, director of marketing at Prudential Investments Advisory Group. "They have their own consulting groups and wrap-fee programs, and their own mutual funds."

However, as brokers move around within the industry, "that may force some consideration of portability," Moore says.

In March, PaineWebber recruited Brian Storms from Prudential Investments to head its mutual fund business, naming Storms president and COO of the firm's Mitchell Hutchins unit. At Prudential, Storms was responsible for spearheading a movement to open distribution of in-house funds to nontraditional channels and improve fund performance.

In fact, the term "proprietary fund" is outdated, Storms tells RR. "Ultimately, you have to make your products available to investors and consumers in a way in which they want to purchase them."

Meanwhile, American Express doesn't distribute any of its American Express IDS funds outside of its retail sales force, but alternative distribution "is something we might consider in the future," says spokesperson Leila Erlandson. --M.H.

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