Sales Intelligence Blog by Lattice Engines

Today’s blog entry is a guest post from Steven Miyao, CEO of kasina. kasina is a trusted advisor to the leaders of the asset management and insurance industries. They innovate distribution through consulting, research, and benchmarking data.

In Part 1 of this series, Ian J. Scott discusses why firms need to rebalance their focus on both acquiring net new assets and minimizing redemptions. In Part 2, Ian addresses new, data-driven techniques to anticipate and mitigate asset outflows. In this installment, we address changes to wholesaler compensation that align wholesaler incentives with overall firm goals.

Compensation is a powerful tool for firms to align their Sales goals with a company’s profitability objectives. When structured optimally, it motivates wholesalers to spend time with the most valuable advisors, rewards wholesalers for balancing sales across products and compensates wholesalers to sell specific products. Yet, most firms continue to implement sales plans that fail to drive profitable behavior, activities and ultimately, results.

Firms should use net sales or a similar proxy to tie the firm’s goals with those of the salesperson by factoring redemptions into variable pay. Using net sales in addition to gross sales and other measures of success helps to manage sales costs and acknowledges that saving a dollar of redemptions is cheaper than identifying new sales opportunities. Though net sales can be difficult to accurately measure, firms should still consider tying some measure of net redemptions into sales compensation. The practice serves to underpin the fact that wholesalers have a role in redemption rates and aligns compensation with corporate profitability.

In studying 2011 wholesaler compensation plans, only 25.0% of asset management firms use net sales as part of commissions to calculate external wholesaler variable pay. 33% of firms completely ignore redemptions and 19% of firms consider net sales as a determinant in bonus calculations. Firms would be wise to make sure that they are not completely ignoring redemptions through the use of net sales, or indirectly though applying offsets. One firm has a large trade policy where sales over $5 million are paid commissions over six months (instead of up front), so that short-term redemptions can be excluded from wholesaler commissions. Another firm that that uses gross sales has started to take redemptions into account by factoring redemption metric into bonuses with the hopes of further increasing the importance of redemptions on compensation in the future.

Compensation can be a great way to influence redemptions, either through using net sales or through emulating net sales. What tactics have you used to influence net sales?

<< Part 1 Part 2 Part 3>>

Related:

Winning in Asset Management Distribution with Predictive Sales Intelligence

How Asset Managers Should Segment Their Clients

Asset Management Firms: Compete with Analytics to Win in Distribution

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Today’s blog entry is a guest post from Steven Miyao, CEO of kasina. kasina is a trusted advisor to the leaders of the asset management and insurance industries. They innovate distribution through consulting, research, and benchmarking data.

Asset managers cannot actively sell to the entire U.S. advisor base of about 300,000. It is simply impossible for scale and small players alike. According to kasina and Horsesmouth‘s FA Vision research, while 25% of advisors’ assets are in model portfolios, influenced primarily by National Accounts teams, the remaining 75% of assets are up for grabs among the advisor population. If firms are only able to reach out to a small percentage of the advisor base, they need the metrics to know with absolute certainty that these are the right advisors. Segmentation is the key to targeting the right advisors at the right firms.

Even a team of 80 external wholesalers can only cover about 200 advisors each (and do it well), or 16,000 total advisors. Adding in 80 internal wholesalers (in a typical 1:1 model) who cover 400 additional advisors and prospects, and 40 hybrid wholesalers (for those firms who employ them) covering 400 each brings the total coverage to 64,000, barely 20% of all advisors.

Segment Clients Based on Potential Profitability

With too few resources to cover all advisors, firms need to focus on companies and advisors with the best likelihood of providing long run profit. To do this, we suggest mapping advisors on two primary dimensions:

• Future Value Potential
• Existing Assets Under Management (AUM) with the firm

Future Value Potential represents the net present value of the future cash flows an advisor is expected to generate over the lifetime of the relationship.  Various models exist to estimate future value potential, and key inputs include:

• Acquisition cost
• Ongoing servicing cost
• Advisor revenue
• Time horizon
• Discount rate

The model above maps existing importance of the advisor to the firm (x-axis) versus potential importance (y-axis).  The model yields four distinct quadrants that require different strategies from the firm.

Segment Relationships Based on Target Profile and Behavior

Not all relationships are alike. Within each quadrant, firms should use data to fine-tune how they interact with and communicate with individual advisors. kasina and Horsesmouth’s FA Vision surveys and kasina’s report The Six Segments: A Comprehensive New Look at Intermediary Behavior, show clear differences among advisors based on interaction preferences, products, and needs across distribution channels.  Firms should utilize key sets of data garnered from their Web usage, CRM system, and third-party databases to segment advisors.  This will help firms identify demographic characteristics and behavioral trends such as:

• Product sales and asset trends
• Website usage
• Contact preferences
• Conference attendance

This information enables firms to tailor specific service strategies and target sub-segments of the advisor population.  For example, a sub-segment of the Most Valued Advisors (high potential and with significant asset with the asset manager) may show a preference for e-mail and be analytical in nature.  This cadre will be candidates for regular, proactive outreach with a tailored e-mail campaign focused on product analytics.

Behavioral segmentation allows firms to sell products that specific advisors are likely to be interested in.  Moving away from a traditional “product push” strategy towards more targeted marketing will ensure firms retain advisor interest and avoid information fatigue. In addition, capturing and acting upon advisor communication preferences fosters trust and loyalty among clients who feel the firm understands their needs and desires.

Profitability-based segmentation (the quadrants above) tells firms who to target while behavioral segmentation yields insights for firms on how to target. Maximizing profitability means maximizing output (sales) per input (cost).  Intelligent distribution hinges on the ability to segment clients and prospects in order to identify what activities will yield the highest return on investment.

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