The Strategic Insight 2012 Fund Sales Survey:

Transcription

1 The Strategic Insight 2012 Fund Sales Survey: Perspectives on Intermediary Sales by Distribution Channel and by Share Class MAY 2013 Strategic Insight an Asset International Company 805 Third Avenue, New York, NY Tel: (212) , Fax: (212) Also available at

2 Copyright 2013 Strategic Insight, an Asset International Company, and when referenced or sourced Access Data, a Broadridge company, Morningstar Inc. and Lipper Inc. All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) may not copied or redistributed for any purpose, (c) are provided solely for information purposes, and (d) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. Reproduction in whole or in part prohibited except by permission. Any data or commentary in this report is for the internal use of client management companies only and is not to be disseminated to the general public and sales intermediaries in the form of regulatory or other reports, promotional material, or advertising without the prior written consent of Strategic Insight. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report. Strategic Insight is available by subscription and by single copy upon request to the publisher.

3 INTRODUCTION AND BACKGROUND In the first quarter of 2013, Strategic Insight approached fund firms that sell primarily through financial intermediaries and requested 2012 sales data (along with 2011 data from those firms who had not participated in last year s survey), broken out by share class pricing structure and distribution channel. This data was analyzed alongside our previous years survey results (encompassing annual sales data from 2006 through 2011). Note that due to additional firms participating in this year s survey and reporting 2011 sales data which was not captured in last year s analysis, as well as some of last year s participants providing restated 2011 figures, some of the 2011 statistics reported in last year s Fund Sales Survey may be slightly different in this year s report. The 2012 sales results in this study represent data submitted by 43 fund firms on their open-end stock and bond mutual fund sales. The 43 participant firms include most of the large companies distributing primarily through financial advisors, as well as many smaller intermediary-distributing firms. Survey participants managed in aggregate $5.1 trillion in long-term fund assets as of the end of 2012, or roughly 56% of total industrywide U.S. open-end stock and bond fund assets. Participants reported in aggregate over $925 billion in open-end stock and bond fund sales during We are thankful to the firms that participated in this survey and confidentially shared their data with SI, enabling us to assemble a representative snapshot of important industry distribution trends some documented uniquely within this annual survey. SI welcomes any suggestions you may have so we can improve this analysis in future years. The unique data and analysis within this annual study provides valuable clarity and benchmarking of share class pricing and distribution channel trends within the intermediary-sold marketplace. As the competitive landscape of selling through financial advisors continues to increase in complexity, we feel that this report should again be valuable to the fund industry as a whole. This report consists of an executive summary, chapters on distribution channel trends and share class use, and an appendix that includes a copy of the survey questionnaire. In addition to the analysis presented in this report, comparing your firm s results to the industry s aggregate often identifies revealing differences and areas of needed focus. If you are interested in further analysis (e.g., how your firm compares to the peer group of fund managers, etc.) or have additional questions, please contact Dennis Bowden (dbowden@sionline.com), author of this report and SI s fund distribution practice leader. 1

4 TABLE OF CONTENTS Key Observations...1 Chapter I: Sales Trends by Distribution Channel...3 Proportional Sales by Channel...3 Sales Growth by Channel...6 Sales by Channel Comparison Across Manager Size Groupings...9 Wrap / Fee-Based Advisory Program Sales...12 Share Class Use within Fee-Based Programs...13 National Broker-Dealer Sales...15 Independent / Regional Broker-Dealer Sales...16 RIA Sales...17 Investment Only Defined Contribution Plan Sales...18 Share Class Use within IODC Channel...18 Proportional Sales by Fund Type within IODC Channel...19 Pure Institutional / Other Sales...20 Bank Broker-Dealer Sales...21 Insurance Agent Sales...22 Chapter II: Sales Trends by Share Class...23 Proportional Sales by Share Class...23 No Load/Asset-Based Fee vs. Point-of-Sale Commission Share Classes...26 Sales Growth by Share Class...26 No Load Shares...27 No Load Share Sales via Fee-Based Programs and IODC Plans...27 A Share Sales...29 A Shares Sold at NAV...30 "A" Share at NAV Sales via Fee-Based Programs and IODC Plans...30 A Shares Sold with High Commissions (4% or Greater)...32 A Shares Sold at Below 4% Commissions...33 Level Load Shares...34 B Shares...36 Appendix...37

5 KEY OBSERVATIONS Sales by Distribution Channel Sales within Wrap/Fee-Based Advisory programs rose to 47% of total sales among our survey group in When excluding retirement and institutional channel activity, Fee-Based Advisory programs accounted for 6 of total sales across the remaining five advisor-focused channels during Within Wrap/Fee-Based Advisory programs, No Load shares continued to increasingly dominate fund sales rising to 68% of such sales among our survey group in Among these No Load sales within fee-based programs, 87% were made via share classes with zero 12b-1 fees. National Broker Dealers (which for the purpose of this survey includes Edward Jones) maintained consistent presence during 2012, garnering 3 of total sales. The median firm in our survey has seen its share of sales to the channel rise from 27% in 2007 to 32% in 2012 as a wider range of firms find success via these large advisor networks. The Investment Only DC (IODC) channel remained relatively flat at 18% of total fund sales in 2012 (falling 0.4% from 2011). The median firm in our survey, however, saw IODC sales increase to 16% of total fund sales in 2012 a 2.4% jump as compared to Within the IODC space, No Load share classes made up the majority sales among our participant managers, accounting for 63% of channel sales in Among these No Load sales, 85% were made to share classes with zero 12b-1 fees. RIAs accounted for 12% of total sales among our survey group during Sales via the RIA channel decreased on an absolute basis for the first time since our survey began, falling 2% in aggregate. From a longer-term perspective, RIAs have increased their share of total fund sales among our survey group by 5.5% since 2006 the largest proportional increase over that period of any standalone channel. Within the more specialized markets of RIA and IODC, the largest managers in our survey have experienced the fastest sales growth since These avenues hold potential for firms willing to commit resources to the space to both expand sales, as well as diversify their overall distribution footprint. 1

6 Sales by Share Class Share classes most conducive to an asset-based fee compensation structure No Load shares, A shares sold at NAV, and Level Load (mainly C ) shares combined to account for roughly 9 of total sales in No Load shares (defined in our survey as share classes without a front load and a 12b-1 fee of 25 basis points or less) continued to lead this movement, expanding to 59% of total sales among our survey group in 2012 (with a growing portion of such No Load sales made to shares with zero 12b-1 fee). This increasing demand for funds lowest-cost share class continues to raise a range of important implications for fund firms around pricing and distribution strategy including evolving fund profitability management and expectations, as well as a shifting regulatory focus toward sub-ta and other fund fees paid to distributors (as marketplace forces largely eliminate the need for dramatic overhaul of Rule 12b-1). A shares continue to face mounting pressure. A shares sold at NAV declined to 21% of total sales in 2012 (down from 33% as recently as 2008), as demand within fee-based programs continues to move toward No Load zero 12b-1 classes. Point-of-sale commission-based A shares accounted to 15% of aggregate sales among our survey group, but the median firm saw only 7% of sales to such shares. High commission A shares (sold at 4% or greater load) made up just 5% of total sales in 2012 (and only 2% of the median firm s sales). Level-Load shares (made up primarily of C shares, as well as some high 12b-1 R shares) remained relatively flat at 1 of total fund sales in Longerterm, however, these shares have fallen from 14% of total sales among our survey group in The demise of B shares accelerated in 2012, as sales of such shares declined by 43% as compared to As of the end of 2012, B shares accounted for just 0.4% of total industry stock and bond mutual fund assets according to Strategic Insight s Simfund database Report Authored by: Dennis Bowden, dbowden@sionline.com, (212) Strategic Insight Editorial Board Avi Nachmany, avi@sionline.com, (212) Dennis Bowden, dbowden@sionline.com, (212) Bridget Bearden, bbearden@sionline.com, (212) Sonia Mata, sonia@sionline.com, (212) Anthony Disanzo, adisanzo@sionline.com, (212)

7 CHAPTER I: SALES TRENDS BY DISTRIBUTION CHANNEL Fund distribution through financial advisors continues to drive a large proportion of growth within the mutual fund industry. As the intermediary-sold marketplace has evolved, more fund managers continue to focus on expanding distribution capabilities across channels and advisor types. The table below provides insight into intermediary-sold marketplace trends by charting aggregate and median proportional sales trends by distribution channel among our participant firms. PROPORTIONAL SALES BY CHANNEL Sales by Distribution Channel as a Percentage of Total Sales Aggregate Total Median Firm National BDs (incl. Edward Jones) % % 26% 29% 31% 3 32% Independent / Regional BDs 24% 24% 25% 25% 24% 23% 29% 2 21% 25% 23% 23% RIAs 7% 1 11% 11% 13% 12% 8% 9% 1 9% 1 11% Pure Institutional / Other 19% 17% 12% 11% 9% 9% 12% 17% 1 6% 5% 3% Bank BDs 9% 5% 5% 6% 6% 6% 6% 3% 4% 4% 4% 4% Insurance Agents 6% 4% 3% 3% 3% 3% 6% 4% 4% 3% 2% 3% Wrap / Fee Based Advisory* 25% 34% 34% 38% 45% 47% 21% 38% 31% 38% 43% 44% Investment Only DC* 21% 22% 19% 19% 19% 18% 14% 12% 15% 13% 13% 16% Source: Reporting fund managers. Not included above are internal sales to HNW private clients, data on which was provided only by a few firms; *Sales % via IODC and Wrap are reflective of only those managers who reported this data. Wrap and some IODC sales may also have spanned multiple channels. Because of these factors, % of total sales will not add to 10. The National Broker Dealer channel (which for the purpose of this survey includes Edward Jones) maintained its consistent presence during 2012, garnering 3 of total sales among our survey group. While the aggregate share of sales to National BDs has remained steady, the median firm in our survey has seen its share of sales to the channel rise from 27% in 2007 to 32% in 2012 as a wider range of firms find success via these large advisor networks. [Beyond the traditional Wirehouses, the inclusion of Edward Jones within our National BD channel contributed significantly to this channel s growth in Based on the new intermediary-sold distribution data in Simfund Pro, 7.0, Edward Jones was among the fastest growing broker dealers with $15.4 billion of net inflows to stock and bond mutual funds during 2012.] o Even as the distribution focus and resource allocation of many traditionally broker-sold fund firms continue to expand across widening ranges of the intermediary-sold marketplace (RIAs, IODC, etc.), the important influence of National BDs remains clear. This channel s concentrated gateways to large and high-producing advisor bases can be seen in the relative steadiness of its proportional sales trends over the six years captured above. o While National BDs will continue as an important distribution avenue for many firms, fund managers also face challenges within this space. The profitability dynamics of the channel (high cost of business acquisition + increased asset velocity within discretionary fee-based programs), combined with the continued growth of independent advisor avenues, should spur many firms to continue efforts toward diversifying their advisor-sold distribution focus and resources. Independent/Regional BDs saw their share of total sales among our survey group decline for the second straight year in 2012, falling to 23% of sales (down roughly 3

8 1.5% from their peak in 2009). The current fragmented landscape of Independent/ Regional BDs has presented challenges for fund firms with some of the larger players operating more in parallel with National BDs (from the perspective of fee-based expansion, home office infrastructure, etc.), but many others still in transition from legacy cultures (transaction-based sales, heavier reliance on annuities or other insurance products, etc.). In total, according to Form ADV data published through InvestmentNews, the largest Independent/Regional BDs garnered 33% of total revenue from fee-based accounts in 2012, up from 31% in 2011 and 29% in o Over the longer-term, the Independent/Regional BD avenue can offer valuable potential growth prospects for fund firms as the maturation and expansion of many small-to-mid-sized firms continues. In addition, the wide range of players within this space also carries important diversification potential for some fund managers away from heavy concentration of sales among a handful of top BDs. Aggregate sales via the Investment Only DC (IODC) channel remained relatively flat as a proportion of total fund sales in 2012 (falling 0.4% from 2011). The median firm in our survey, however, saw IODC sales increase to 16% of total fund sales in 2012 a 2.4% jump as compared to This represented the median firm s highest reliance on the IODC channel in the six years captured. While the IODC marketplace remains relatively concentrated among the top players from an absolute dollar of sales perspective, this growth in the median firm s sales show a greater range of managers dedicating resources to this channel and beginning to find success in making this avenue a more substantive part of their overall distribution efforts. o Beyond growth opportunities, increased diversification of sales to the IODC channel may also offer fund managers value from an asset stability perspective. As greater proportions of new sales are made via no load share classes within higher-velocity fee-based accounts, the average longevity (i.e. holding period) and profitability characteristics of fund firms asset bases continues to decrease. Expansion within the buy and hold oriented IODC space may offer one avenue toward increasing the stability characteristics of a firm s aggregate asset base. The graph below provides another look at the fund distribution landscape, charting proportional sales by channel for each of 2010, 2011 and % of Total Gross Sales 5 45% 4 35% 3 25% 2 15% 1 5% Sales by Distribution Channel as a Percentage of Total Sales Wrap/Fee Based Advisory* Nat'l BDs Indep/Reg'l Investment BDs Only DC* *Only among firms providing breakdowns of Wrap/Fee-Based Advisory and Investment Only DC sales, respectively. Note - these sales may span multiple standalone channels. RIAs Pure Inst'l/ Other Bank BDs Insurance Agents 4

9 A few additional notes on proportional sales trends by channel: Sales within Wrap/Fee-Based Advisory programs continued to garner an increasingly dominant proportion of intermediary-sold fund sales during 2012, rising to 47% of total sales among our survey group. When excluding IODC and Pure Institutional channel activity, Fee-Based Advisory programs accounted for 6 of total sales across the remaining five advisor-focused channels during o Across the industry as a whole, SI estimates that roughly 80-85% of total new fund sales outside of retirement plans are made today within some type of fee-for-advice relationship structure. This estimate accounts for the full range of fund sales to fee-only RIAs, as well as the increasing presence of traditionally no-load, direct-sold fund managers (who are not reflected in our survey results) within the intermediary-sold marketplace. Sales via RIAs accounted for 12% of total sales among our survey group during The RIA channel saw its share of total sales contract slightly (-0.7%) in 2012, after registering the largest share of sales gain of any standalone channel (+2%) in From a longer-term perspective, RIAs have increased their share of total fund sales among our survey group by 5.5% since 2006 (as captured in the graph below) the largest proportional increase over that period of any standalone channel. RIA Sales as a Percentage of Total Sales 14% 14% 12% 12% 1 1 8% 8% 6% 6% 4% 4% 2% 2% While the data captured in this report and depicted above reflects the expanding RIA focus of traditionally broker dealer-dependent fund firms, it does not include many of the specialized no-load firms with long-standing RIA presence (such as DFA and others). According to Simfund Pro, 7.0, the 43 firms captured within our 2012 survey group made up roughly one-half of the total open-end stock and bond mutual fund assets held within the RIA channel as of the end of By comparison, these 43 managers controlled approximately three-quarters of the long-term fund assets held within the combined National BDs and Independent/Regional BD universe. Thus, our survey results should not be interpreted as RIAs total share of sales for the fund industry as a whole, but as a reflection of the RIA channel s growing importance among traditional fund managers. While the competitive landscape for asset managers across all advisor-sold channels continues to expand (from the 5

10 growing presence of traditionally direct-sold funds via broker dealer fee-based programs, to ETFs, and elsewhere), the RIA channel presents the most diverse market. Though traditionally broker dealer-sold managers are still in many cases building from a relatively small base within the RIA community, our survey results indicate that the increased resources and focus on this space over the past decade have, and continue to, yield value (despite at times choppy growth) in building presence within the growing RIA marketplace. SALES GROWTH BY CHANNEL The following section shifts perspectives on distribution channel sales by charting the annual growth rate trends of each channel. Overall fund sales among our survey group increased 3% in 2012 (versus 4% sales growth for the industry in total, according to ICI data). While this growth was modest compared to the past two years, it did represent the third consecutive year of sales expansion. In addition, the median firm also saw total sales increase for the third straight year. Sales by Distribution Channel Annual Sales Growth (%) Aggregate Total Median Firm Total Gross Sales 19% -9% -5% 14% 1 3% 1-6% -11% 22% 12% 2% Insurance Agents 17% -22% -33% 15% 4% 7% 21% -19% 18% 2% 3% Bank BDs 24% -46% -6% 12% -2% 5% 26% -27% -1 6% 7% 1% National BDs 22% -13% 2% 16% 5% 5% 12% -11% 9% 26% 9% 6% Wrap / Fee Based Advisory 19% 17% 12% 27% 26% 2% 17% 8% 4 31% 2% Investment Only DC 29% -7% -1 14% 14% 1% 28% -19% -8% 4% 11% 5% Pure Institutional / Other 18% -2-22% 1 7% 0.2% 2-22% -16% 23% 3% -2% RIAs 16% 22% 2% 5% 19% -2% 21% 18% -7% 9% 16% -8% Independent / Regional BDs 16% -15% 2% 22% 9% -7% 18% -7% -12% 34% 2% -1% Sales to National BDs increased by 5% in aggregate during 2012 and have grown during each year since 2008 (the only standalone channel above to hold this distinction). In addition, the median firm saw sales expand by 6% within the National BD channel in In fact, the median firm s sales growth via National BDs has exceeded the aggregate growth rate during each of the past five years, as the range of firms finding success via this avenue has continued to increase. Although aggregate sales via the Independent/Regional BD channel declined by 7% during 2012, the median firm in our survey saw such sales decrease by only 1%. While certain areas of the Independent/Regional BD marketplace clearly presented challenges to fund firms during 2012, the more stable median firm growth rate suggests that many firms were in fact able to maintain relatively steady sales (or even expand) via this avenue. Sales via the RIA channel decreased for the first time since our survey began, falling 2% in aggregate during The median firm saw sales to RIAs drop by 8%, its largest decline since falling 7% in While many of the traditionally broker dealersold firms within our survey continue to make significant strides toward establishing lasting presence and trust within the RIA channel, the overall unique and heterogeneous characteristics of the RIA community leave those fund managers who may be earlier in this process susceptible to more volatile ongoing growth trends. 6

11 The graphs below present additional perspective around distribution channel sales growth both in 2012, as well as longer term since The graph first highlights the relationship between aggregate growth rates and those of our median firm during With aggregate totals at times skewed by the experience of larger firms, this comparison offers valuable additional perspective on the scope of growth among the wider range of mid- and smallsized firms within each channel. 25% 2 15% 1 5% -5% -1 Sales by Channel: 2012 Sales Growth (%) - Aggregate Total vs. Median Firm Aggregate Total Median Firm 25% 2 15% 1 5% -5% -1-15% Insurance Agents Bank BDs Nat'l BDs Wrap/Fee Based Advisory IODC Pure Inst'l/ Other RIAs Indep/Reg'l BDs -15% The second graph below captures the aggregate versus median cumulative growth rate comparisons by channel for the extended period of 2009 to Total Sales Wrap / Fee-Based Sales by Channel: Cumulative Sales Growth % 2009 to 2012 RIA Aggregate Total IODC Indep / Reg'l BD National BD Median Firm Insurance Bank BD Pure Inst'l / Other Overall, sales growth among our survey group has been relatively steady at roughly 2 across the majority of channels above since Notably, Wrap/Fee-Based Advisory sales have grown at more than twice the rate of any standalone channel since 2009 (expanding by a cumulative 58% since 2009). The RIA and IODC channels ranked as the fastest-growing standalone channels, with each expanding by approximately 24% since 2009 among our survey participant group. Although growing from a smaller base than the broker dealer channels, the RIA and IODC avenues have been two areas of elevated focus (and resource allocation) for many traditionally broker dealer-sold firms. The growth via these channels since 2009 reflects both the progress of such efforts, as well as the potential opportunities which these areas may continue to offer moving forward. 7

12 Additional Resources from Strategic Insight to Help Shape Your Distribution Strategy Simfund Pro, 7.0 Strategic Insight s recently enhanced Simfund Pro, 7.0 database offers the most holistic, top-down coverage of the intermediary-sold distribution marketplace tracking roughly $7 trillion of stock and bond mutual fund and ETF assets monthly (as well as corresponding net flows) across more than 900 distributors and 9 distinct channels, including: National BDs, Independent/Regional BDs, RIAs, Private Banks, Trust Co. s, Bank BDs, Discount Supermarkets, and more Simfund Pro, 7.0 has been widely adopted and has become essential in helping our clients formulate both strategic and tactical action plans. These enhanced analytics combined with the existing classifications, performance, fee, and other data within SI s Simfund database create unique abilities to identify the best growth opportunities by channel, distributor, and product type. The reports included below provide examples of the types of analysis which can be done using Simfund Pro, 7.0: - U.S. Intermediary-Sold Fund Distribution Review ETF Trends by Channel & Investor Type Simfund Pro, 7.0 allows you to identify the highest inflow and outflow distributors and/or channels within certain investment categories Which distributors might be most receptive to our best funds or to certain new product launches? 8

13 SALES BY CHANNEL COMPARISON ACROSS MANAGER SIZE GROUPINGS The competitive landscape across the intermediary-sold marketplace has continued to expand to include wider ranges of opportunity for both large and small firms (driven by the movement to fee-based platforms, the increased influence of centralized due diligence teams, the expanding scope of focus on the RIA community, etc.). This section provides more granular benchmarking of sales trends by distribution channel according to manager size analyzing the composition of growth across channels and how that may be evolving. The analyses presented in this section segment the 40 managers within our survey who provided sales by channel data during both 2011 and 2012 into four buckets based on their total industry assets under management within open-end stock and bond mutual funds as of the beginning of Tier 1 managers include 11 firms with greater than $75 billion of long-term fund assets as of the start of 2012; Tier 2 managers encompass 12 firms with between $45 and $75 billion; Tier 3 covers 9 firms with $25 to $45 billion of assets; and Tier 4 contains 8 firms within less than $25 billion. The graphs below provide perspective on the types of managers who drove growth during 2012 within each of the National BD, Independent/Regional BD, RIA and IODC channels; as well as how dependent each Tier of managers was on each of these channels. The Y-axis plots each Tier s median manager 2012 sales growth within each respective channel. The X-axis captures the median manager s proportion of total 2012 sales made to the channel. The size of the bubbles corresponds to the absolute size of channel sales for each Tier. Median 2012 NBD Sales Growth Rate % 2 15% 1 5% -5% -1 National BD Growth Dynamics Across Manager Size Groupings: Median 2012 Sales Growth vs. Median 2012 Share of Total Sales Tier 4 Managers 7% Tier 3 Managers Median 2012 Growth % = 16% Tier 1 Managers -1% Tier 2 Managers 4% -15% Bubble Size = Manager Tier's Aggregate Proportion of Total Survey-Reflected 2012 National BD Sales -2 5% 1 15% 2 25% 3 35% 4 45% Median 2012 Nat'l BD Sales as a % of Total Manager Sales Median 2012 IBD Sales Growth Rate % 2 15% 1 5% -5% -1-15% Indep/Reg'l BD Growth Dynamics Across Manager Size Groupings Median 2012 Sales Growth vs. Median 2012 Share of Total Sales Tier 4 Managers -4% Tier 3 Managers Median 2012 Growth % = 3% Bubble Size = Manager Tier's Aggregate Proportion of Total Survey-Reflected 2012 Indep/Reg'l BD Sales Tier 2 Managers -2 5% 1 15% 2 25% 3 35% 4 45% -8% Tier 1 Managers -3% Median 2012 Indep/Reg'l BD Sales as a % of Total Manager Sales RIA Growth Dynamics Across Manager Size Groupings: Median 2012 Sales Growth vs. Median 2012 Share of Total Sales IODC Growth Dynamics Across Manager Size Groupings: Median 2012 Sales Growth vs. Median 2012 Share of Total Sales 2 2 Median 2012 RIA Sales Growth Rate % 15% 1 5% -5% -1-15% Tier 3 Managers -4% -12% Tier 1 Managers Median 2012 Growth % = 3% Tier 2 Managers -6% Tier 4 Managers Bubble Size = Manager Tier's Aggregate Proportion of Total Survey-Reflected 2012 RIA Sales Median 2012 IODC Sales Growth Rate % 15% 1 5% -5% -1-15% Tier 3 Managers 12% Tier 2 Managers -2% Tier 1 Managers Median 2012 Growth % = 8% Tier 4 Managers 1% Bubble Size = Manager Tier's Aggregate Proportion of Total Survey-Reflected 2012 IODC Sales -2 5% 1 15% 2 25% 3 35% 4 45% Median 2012 RIA Sales as a % of Total Manager Sales -2 5% 1 15% 2 25% 3 35% 4 45% Median 2012 IODC Sales as a % of Total Manager Sales 9

14 In totality, the dynamics of the four channels captured present interesting insight into the evolution of the intermediary-sold marketplace in Some key observations from the preceding graphs: Within the broker dealer channels, many of the small- and mid-sized managers in our survey (Tiers 3 and 4) saw strong sales growth during The median Tier 3 manager led sales growth via both National BDs and Independent/Regional BDs in 2012 increasing sales by 16% and 3% within each channel, respectively. o While some of these firms carry long-standing presence within the BD space, others have more recently expanded their distribution footprints away from largely proprietary or other more narrowly focused efforts and have found success via broker dealer advisor pools. Within the more specialized markets of RIA and IODC, the largest managers experienced more success as the median Tier 1 manager s 3% sales growth via RIAs ranked as the fastest of any manager pool during 2012, while its 8% expansion within the IODC space was the second-fastest. o Given the at times more fragmented nature of the RIA and IODC avenues (less centralized due diligence teams and processes within the RIA market; more specialized advisors and/or gatekeepers via IODC), these results suggest that the resource allocation and sales force advantages of many large firms can clearly pay dividends. The graph below presents a longer-term view of channel growth trends across manager size groupings. It charts the median cumulative sales growth rate from 2009 to 2012 across channels for each of the previously defined manager Tiers Median Sales Growth by Channel Across Manager Size Groupings: Cumulative 2009 to 2012 Growth % National BD Independent/Reg'l BD RIA IODC Tier 1 (> $75B) Tier 2 ($45-75B) Tier 3 ($25-45B) Tier 4 (< $25B) Since 2009, Tier 1 managers have generally maintained positive sales growth within their two largest channels (National BD and Independent/Regional BD), but have experienced their most significant growth in building expanded footprints via RIAs and IODC (where the median Tier 1 firm grew sales by 54% and 37%, respectively). 10

15 o While the broker dealer channels remain areas of strong traditional presence for many larger fund firms, the RIA and IODC channels have clearly offered strong growth potential for many firms in expanding sales and diversifying their overall distribution footprint. At the same time, the median Tier 3 firm has experienced the most success at National BDs by a wide margin increasing sales by 66% since As the culture of many large broker dealers continues to evolve from one fund at a time (or even one fund family at a time ) transaction-based portfolio construction to multi-fund feebased portfolios, opportunity continues to expand to a wider range of fund managers who are able and willing to commit the significant resources to gaining traction within these systems. Notably, the median Tier 4 firm has experienced muted growth via most channels since 2009, but enjoyed the largest sales increase via IODC. These results suggest that specialization and focus of resources on a particular channel can also benefit smaller firms though such focus may typically be concentrated within narrower market segments (such as IODC) than for larger firms. 11

16 WRAP / FEE-BASED ADVISORY PROGRAM SALES Wrap / Fee-Based Advisory Sales Percentage of Total Sales Annual Sales Growth Aggregate Total 25% 34% 34% 38% 45% 47% 19% 17% 12% 27% 26% 2% Median Firm 21% 38% 31% 38% 43% 44% 17% % 2% Note: Among those firms who reported wrap/fee-based advisory sales data. The intermediary-sold marketplace clearly continues to move toward an increasingly feefor-advice culture. Wrap/Fee-Based Advisory Program sales grew to 47% of total sales among our survey group during 2012, up from 45% in 2011 and just 25% as recently as When excluding institutional and retirement channel activity, Wrap/Fee-Based Advisory programs accounted for 6 of total sales across the remaining advisor-focused channels in our survey during In totality, SI estimates that roughly 80-85% of total new fund sales outside of retirement plans industrywide are made today within some type of fee-for-advice relationship structure (accounting for the full range of fund sales to RIAs, as well as the increasing advisor-sold presence of traditionally direct-sold fund managers). This fee-based growth has been driven from several angles including the persistently rising share of sales to fee-based platforms within the largest broker dealers; movements to establish and expand fee-based culture within fast-growing emerging broker dealers; and the continued increasing influence of the RIA community. Beyond investor experience factors (whether actual or perceived), powerful incentives around increased profitability and consistency of revenue continue to push many distributors toward greater dependence on fee-based sales both through incentivizing advisors to utilize fee-based programs, as well as enhancing the infrastructure and capabilities of such platforms. While the secular movement toward fee-based sales has offered substantive opportunity for fund managers selling through advisors, it also continues to present a myriad of challenges. One such challenge revolves around share class use within fee-based accounts. Over the past several years, sales within fee-based programs have continued to transition rapidly toward No Load share classes without 12b-1 fees (where in the past, such fees have assisted with distributor revenue-sharing expenses). The graph below details this trend by charting the share of fee-based program sales to A shares at NAV versus No Load shares Proportional Sales Through Wrap / Fee-Based Advisory Programs by Share Class 59% 41% "A" Shares at NAV 51% 49% 43% 57% No Load Shares 65% 35% 33% 68% *Among the 20 firms in 2012, 22 firms in 2011, 21 firms in 2010, 17 firms in 2009 and 15 firms in 2008 providing breakdowns of No Load and "A" at NAV sales via Wrap/Fee-Based Advisory Programs. 12

17 No Load shares continued to increasingly dominate fund sales within fee-based programs, rising to 68% of such sales among our survey group in Conversely, use of A shares at NAV (which generally carry 0.25% of 12b-1 fees) within fee-based scenarios have been nearly cut in-half since 2008, declining to 33% of total fee-based sales among our survey group in Within this trend, the overwhelming majority of such No Load sales are coming via share classes without a 12b-1 fee, as captured in the graph below. No Load Shares Proportional Sales Breakout within Wrap / Fee-Based Advisory Programs No Load Shares w/12b-1 Fee 26% 74% 16% 84% 88% 87% 12% 13% *Among the 19 firms in 2012, 23 firms in 2011, 25 firms in 2010 and 17 firms in 2009 providing such breakdowns of No Load share sales via Wrap/Fee-Based Advisory Programs. No Load Shares w/out 12b-1 Fee During 2012, 87% of the No Load sales within fee-based programs captured in our survey were made within share classes without a 12b-1 fee (among the 19 firms providing a breakout of fee-based No Load sales with and without 12b-1 fees). When adding back sales to A shares at NAV (which would fall into the with 12b-1 fees bucket), No Load shares with zero 12b-1 fee accounted for roughly 6 of all fee-based sales among our survey group in 2012 up from only about 35% in This trend continues to be led by the transition to zero 12b-1 fee share classes within wrap platforms of many of the largest broker dealers (particularly the Wirehouses), as well as certain emerging BD players. This increasing demand among many distributors and advisors for funds lowest-cost share class continues to shift more of the retail fund business into institutionally-priced shares. For fund managers and the industry as a whole, this continuing trend has brought a range of important implications around pricing and distribution strategy. It has also contributed strong evidence to the debate around Rule 12b-1 reform showing that marketplace forces continue to drive fund activity away from share classes with 12b-1 fees, largely eliminating the need for dramatic overhaul of the Rule. A few more recent considerations for fund firms around this secular trend: - A shifting regulatory focus around fund fees and distribution payments. With marketplace forces rapidly diminishing the use of Rule 12b-1 fees to pay for fund distribution, the SEC s focus has shifted to other payments made to distributors such as those through sub-ta fees, shareholder servicing, and other revenue sharing mechanisms. These revenue/cost-sharing arrangements with distribution 13

18 partners are an area of increasing focus from the perspective of sales and marketing, operations, legal and compliance, and with fund boards of directors. - Evolving profitability management and expectations. Greater proportions of fund firms asset bases continue to migrate into share classes with lower or zero embedded distribution fees both through the new sales trends captured in this report, as well as asset transfers from other share classes (such as A s) as distributor platforms shift their pricing requirements on both new and existing assets. In addition, the relative cost of business acquisition and asset maintenance continues to rise in the form of revenue/cost sharing demands among a growing number of distributors (led by the Wirehouse space). This combination of factors, along with the lower asset persistency characteristics inherent of fee-based platforms (particularly within the fast-growing FA-discretionary space), continues to alter the profitability dynamics of growing portions of fund firm assets and will place increasing pressure on overall margins. The graph below presents another view of the importance of Wrap/Fee-Based Advisory sales by charting the frequency of proportional sales at a firm level across our universe of survey participants. So, for example, 48% of participant firms garnered over 45% of their total 2012 fund sales through fee-based programs, while no firms saw less than 15% of total sales go through such avenues in % of Surveyed Firms 55% 5 45% 4 35% 3 25% 2 15% 1 5% Sales Through Wrap / Fee-Based Advisory Programs as a Percentage of Total Sales Source: Based on data from 21 reporting firms in 2012, 26 firms in 2011 and 29 firms in Over 45% 30-45% % % of Total Gross Sales % 5 45% 4 35% 3 25% 2 15% 1 5% A few additional observations on the trends captured above: Wrap/Fee-Based Advisory sales continue to become an increasingly important part of total fund sales for a growing range of firms. Nearly one-half of the firms reflected above saw fee-based programs account for more than 45% of their total fund sales in 2012, jumping from 38% in 2011 and 32% in More broadly, 81% of firms above relied on Wrap/Fee-Based Advisory sales for more than 3 of total sales in Conversely, only 19% of survey managers saw fee-based sales account for less than 3 of 2012 sales, and none for less than 15%. 14

19 NATIONAL BROKER-DEALER SALES National Broker Dealer Sales Percentage of Total Sales Annual Sales Growth Aggregate Total % % -13% 2% 16% 5% 5% Median Firm 27% 26% 29% 31% 3 32% 12% -11% 9% 26% 9% 6% The National Broker Dealer channel (which in our survey includes Edward Jones) maintained its consistent positioning as the top-selling channel among our survey group. National BDs garnered 3 of total sales during 2012, while increasing sales by 5% on an absolute growth rate basis. National BD firms continue to be among the most important distribution partners for a wide range of fund managers. While sales growth to National BDs may lag that of certain emerging channels (such as RIAs, for example) during years of rapid overall industry growth, our survey results show National BDs continued importance. In particular, fund firms reliance on this channel can be seen in its strong relative sales growth during years in which overall industry sales regress (such as 2012, when overall growth across all channels for our survey group was just 3%, as compared to double-digit expansion in both 2010 and 2011). These opportunities for growth reinforce the reliability and importance of the National BD channel. The graph below charts the proportion of reporting firms which garnered varying percentages of their total sales via the National BD channel. For example, 1 of reporting firms saw National BDs account for over 45% of their total 2012 sales (up slightly from 9% in 2011). % of Surveyed Firms 55% 5 45% 4 35% 3 25% 2 15% 1 5% Sales Through National Broker Dealers as a Percentage of Total Sales Source: Based on data from 40 reporting firms in 2012, 45 firms in 2011, and 45 firms in Over 45% 30-45% % % of Total Gross Sales 55% 5 45% 4 35% 3 25% 2 15% 1 5% The proportion of firms relying on the National BD channel for more than 3 of total sales (combining the two left-most groupings above) rose to 58% during 2012, up from 49% in 2011 and 53% in As discussed previously, many small- and mid-sized firms were able to capitalize on opportunities to expand sales within the National BD channel during

20 INDEPENDENT / REGIONAL BROKER-DEALER SALES Independent / Regional Broker Dealer Sales Percentage of Total Sales Annual Sales Growth Aggregate Total 24% 24% 25% 25% 24% 23% 16% -15% 2% 22% 9% -7% Median Firm 29% 2 21% 25% 23% 23% 18% -7% -12% 34% 2% -1% Independent/Regional Broker Dealers saw their share of total fund sales among our survey group decline slightly for the second consecutive year, falling to 23% of total sales in From an absolute growth rate perspective, Independent/Regional BD sales contracted by 7% in aggregate during The median firm, however, experienced a dip of only 1% as many individual firms were able to stabilize sales despite difficult conditions within certain segments of the Independent/Regional BD marketplace. Dependence on the Independent/Regional BD channel among our survey group since 2007 has remained relatively steady overall peaking at 25% in the years following the financial crisis, but declining more recently to roughly its original pre-crisis levels. While many of the broker dealers encompassing this channel continue to evolve and mature, opportunities should continue to exist (and expand over time) for fund firms to benefit from the expanding scale of established firms, as well as engage emerging players within this space. The distribution of firm-level dependence on the Independent/Regional BD channel presented in the graph below offers interesting perspective on the evolving importance of this channel within individual fund firms businesses. % of Surveyed Firms 6 55% 5 45% 4 35% 3 25% 2 15% 1 5% Sales Through Independent / Regional Broker Dealers as a Percentage of Total Sales Source: Based on data from 40 reporting firms in 2012, 45 firms in 2011 and 45 firms in Over 45% 30-45% % % of Total Gross Sales 6 55% 5 45% 4 35% 3 25% 2 15% 1 5% As aggregate sales to Independent/Regional BDs declined in 2012, the proportion of firms relying most heavily on this channel also decreased. The percentage of firms garnering more than 3 of total sales via the channel fell to 2 in 2012, down from 31% in 2011 and 29% in Even as the heaviest reliance on Independent/Regional BDs decreased, the channel still held solid positioning within a majority of survey firms distribution footprints. Such sales encompassed between 15% and 3 of total fund sales for 55% of firms, while the proportion of firms garnering less than 15% of sales via these broker dealers actually declined slightly to 25% in 2012 (from 27% in 2011). 16

21 RIA SALES RIA Sales Percentage of Total Sales Annual Sales Growth Aggregate Total 7% 1 11% 11% 13% 12% 16% 22% 2% 5% 19% -2% Median Firm 8% 9% 1 9% 1 11% 21% 18% -7% 9% 16% -8% The RIA channel s share of total fund sales among our survey group declined slightly during 2012, falling to 12%. Since 2007, however, RIAs remain the fastest growing channel within our survey increasing their share of sales by more than 5%. [Note that the figures above understate RIAs share of overall fund industry sales, given such advisors historical focus on no-load boutique and specialized fund managers not included in this survey. A number of important firms with substantive RIA presence, such as DFA and others, are not included in the data above.] While substantive engagement of the RIA channel remains at its early stages within many of the firms in our survey group, this marketplace does offer substantive opportunity. According to the new intermediary-sold distribution data transparency in Simfund Pro, 7.0, the RIA channel in totality saw $56 billion of net inflows to long-term mutual funds during As the culture across the intermediary-sold marketplace continues to move in many aspects toward greater sophistication (discretionary account management, large advisor teams, etc.), fund due diligence and advisor-engagement practices across channels is converging. While differences clearly continue to exist between advisor types, the overarching movement in fund managers distribution strategies regardless of channel toward more sophisticated sales forces, marketing efforts and product strategies should cater to the RIA community and benefit firms attempting to expand presence within this space. The graph below charts the ranges in proportional sales to the RIA channel across our participant firms in each of 2010, 2011 and % of Surveyed Firms 55% 5 45% 4 35% 3 25% 2 15% 1 5% Source: Based on data from 39 reporting firms in 2012, 44 firms in 2011 and 44 firms in Sales Through RIAs as a Percentage of Total Sales Over 15% 10-15% % % of Total Gross Sales % 5 45% 4 35% 3 25% 2 15% 1 5% While the proportion of firms garnering more than 1 of their total fund sales via RIAs actually increased from 47% in 2011 to 49% in 2012, the percentage of managers relying on RIAs most heavily (for over 15% of sales) fell from 36% in 2011 to 26% in

22 INVESTMENT ONLY DEFINED CONTRIBUTION PLAN SALES Investment Only DC Plan Sales Percentage of Total Sales Annual Sales Growth Aggregate Total 21% 22% 19% 18% 19% 18% 29% -7% -1 13% 13% 1% Median Firm 14% 12% 15% 13% 13% 16% 28% -19% -8% 4% 1 5% Note: Among those firms who reported IODC sales data. Sales via the Investment Only DC (IODC) channel accounted for 18% of total sales in 2012 among the 39 survey participant firms reporting a breakout of such business. IODC sales, which span across many of the standalone channels captured in our survey, have maintained a relatively consistent share of overall sales since While the IODC space does remain an extremely competitive marketplace with still above-average concentration among the top players, more firms are devoting resources to establishing presence within this channel. The median firm saw its share of sales to IODC increase to 16% in 2012 the highest level since the start of our survey. The IODC channel presents a number of unique challenges to fund firms, including meeting the varying pricing demands of different retirement plans. The graph below examines share class use within the IODC channel by charting the percentage of total IODC sales made via each of A shares at NAV, No Load shares, and other classes. Proportional Sales by Share Class Through Investment Only DC Channel 8 "A" Shares at NAV No Load Shares Other Share Classes (Level-Load, etc) % 57% 58% 64% 63% % 22% 26% 17% 26% 16% 23% 13% 21% 16% *Among the 26 firms in 2012, 27 firms in 2011, 25 firms in 2010 and 22 firms in 2009 providing breakdowns of No Load and "A" at NAV share sales via IODC. No Load share classes (by SI definition, shares with no load and 12b-1 fees of 25 basis points or less) made up the majority of IODC sales among our participant managers, accounting for 63% of channel sales in Among these No Load sales, 85% were made to share classes with zero 12b-1 fees. While IODC activity within such no load, zero 12b-1 shares may be concentrated among a relatively smaller number of large plans (though serving many participants), this valuable market segment continues to demand more institutional-like pricing within the mutual fund structure allowing plans to meet increased regulatory disclosures around pricing transparency, while also helping funds to compete with the pricing of Collective Investment Trusts and other institutional vehicles. A shares sold at NAV (typically carrying 25 basis points of 12b-1 fees) declined to 21% of total IODC sales in 2012, down from 23% in 2011 and 27% in At the same time, 18