“With the traditional, actively-managed 40 Act fund gradually losing market share, asset managers need to modernize their product development process to seriously consider emerging trends in retail, or advisor-sold, investment products,” said Loren Fox, Director of Research at Ignites, during a recent #WebinarWednesday session on product development.
The discussion, which featured insights from FIS, MFS, and Wells Fargo Asset Management, focused on key trends in product development based in part on a recent study performed by Ignites Research.
The report, “Shifting Gears in Product Development,” assessed survey responses from 407 elite financial advisors across broker-dealer and RIA channels. “We asked them what they’re looking for in a new product,” Fox said. “They unanimously (100%) agreed that the product’s fit within the client portfolio is the most important investment trait they consider using.”
Asset class and track record of investment performance, cited by 96% and 84% of advisors, were also considered critical attributes. “If there’s any surprise here, it’s that the expense ratio of a new product ranks as low as fourth (78%) given all the talk in the industry about cost,” Fox said.
As far as where new product ideas originate within companies, another Ignites study has shown that roughly 27% come from product personnel, with another 27% from portfolio managers. Meanwhile, 24% of new product ideas emanate from the sales department, 12% from national accounts, and 10% from marketing.
An Evolving Industry
Jason Baldesare, Director of Strategy and Solutions Management at FIS, agreed that asset managers are looking to expand into additional markets and acquire clients by introducing new products into the market. “We’re seeing a large increase in multi-asset class portfolios over the years, and that’s where, as a technology provider, we get pulled in the most given the additional complexity,” he said.
Ravi Arulanantham, Head of Strategy and Product Development at Wells Fargo Asset Management, said the institutionalization of retail has led to greater centralization in decision making, increased sophistication of manager selection teams, and, in some cases third-party investment consultants participating in the process.
“This leads more scrutiny and institutional-like assessment of product, going beyond three- and five-year performance to look at things like process, culture, and team stability,” he said.
Product Development Committees
Ignites has found that the vast majority of asset managers formalization their ideation process through a product development committee, Fox said.
Dave Connelly, Head Product Development at MFS, said his firm’s strategic product team is responsible for creating new strategies, approving new vehicles, and conducting rationalization reviews.
“The group includes the most senior members of the firm from our investment management distribution, product, finance, and legal teams,” he said. “Equally important, we have a product committee that vets a lot of the issues, whether they be investment-oriented, operational, legal, or other risks associated with introducing new products.”
MFS also has a distribution-focused product evolution team with cross-channel representatives who prioritize different product initiatives. “These groups all meet on a monthly basis to set the agenda and make sure we have coordination between the teams,” Connelly said.
Product Innovation and Technical Considerations
Arulanantham said the best new product ideas resolve an existing client problem. “If you take a broader definition, innovation lies in solving for a particular outcome as well as novel pricing approaches — think about the type of customization you can get through a managed account construct,” he said.
Innovation also stems from thought leadership, or “all of the things that surround a product or strategy that helps people better understand how to use it as part of their practice and their portfolios,” Arulanantham added.
As a technology provider in the middle and back office space, Baldesare said FIS aids companies in the areas of data and risk management. “It’s no longer just making a change to the core accounting engine to handle a new asset class,” he said. “For example, it might be private equity that’s being introduced, and you’ve got a separate system that handles that, and now you have to think about integrating those together to have one valuation for that portfolio with liquid and illiquid assets.”
Overall, Baldesare said these new products don’t spawn a brand-new operational process. “They do introduce new requirements and changes to existing processes,” he said. “As complexity increases, so do those requirements and changes.”
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