Top 5 Questions Boards Need to Consider During Times of Crisis to not only Retain Assets, but Grow them

Like it or not, we are living in interesting times.  The shudder that ran through the global economy as a result of the pandemic has emphasized the need for boards to work closely with fund management to determine the best way forward for the business. As firms across all industries are grappling with the new norms of work from home, virtual meetings, staggered shifts, etc., it's imperative that fund boards actively engage to better understand how management is planning to retain and grow assets going forward.  Boards are tasked with protecting the best interests of shareholders, which means growth and sustainability is the key to long-term success.

Questions Boards Need to Consider During Times of Crisis to not only Retain Assets, but Grow themFollowing are five suggested questions for boards to ask of fund management at your next upcoming board meeting.

  1. How does a fund family stand-out in a crowded marketplace that has been rocked by so much uncertainty?

To begin, it is helpful to educate the board on the market landscape.  Even before today’s global crisis, the forces driving market evolution and challenges were many:

  • Product proliferation
  • Platform rationalization
  • Regulatory expansion
  • Growth of passive
  • Pricing pressures
  • Investor confusion
  • Geopolitical & economic concerns

While those are simply a few of the challenges for firms, they make clear that the key will be to level set on external and internal factors and how the manager can navigate these challenges.

The next step is an honest assessment of the product offering to determine whether a fund is sellable, where it fits within the marketplace, and if there is a need/demand for its style. While the larger firms in the market enjoy an advantage because of scale, there is a distinct opportunity for smaller firms to succeed. Bigger does not necessarily translate to better...better is better.  Firms that are specialized and focused with respect to investment process, doing what they are best at, have a clear opportunity to compete globally for assets.  One example is using a niche investment strategy to complement other funds within an asset allocation model. In that scenario, boards rely on the manager to explain the vetting process by the intermediary firm and by the manager on the portfolio construction, and more importantly, on the impact of redemptions should the fund be removed from the model portfolio.  Understanding the marketplace, how and where products are sold, and how a fund fits in are essential points of understanding for boards as they work with management on a way forward.

  1. What is management’s distribution strategy and how will it evolve in our new world?

Once the board has a common view of the market hurdles, the discussion should turn to fund management’s strategic distribution plan and how this plan remains fluid, flexible and nimble given constantly changing times. Clearly, management should have a long-term growth plan, set forth to address three and five-year goals. To balance, management should also have an outline as to how it plans to address near-term challenges not only during government-imposed lockdowns, but also volatile markets and other business disruptions.  Boards need to request an overview of the distribution plan in order to better understand how the funds might be affected, and to get a sense from management as to what it views as success and the likelihood of reaching its growth goals.

As part of the firm’s product assessment, management should be realistic in evaluating its full suite of funds, the pricing and share class structure of the funds, and whether there should be modifications. Questions should be addressed as to the feasibility of developing a line of exchange-traded funds (ETFs) as part of the existing U.S. product offering or perhaps designing UCITs to leverage existing investment strategies and break into global markets, which can diversify sources of revenue for the asset manager.  Although the board may not be directly responsible for oversight of other products, knowing the responses will provide useful during 15c evaluations of the investment adviser’s comprehensive business model.

  1. How much will it cost to invest wisely in distribution?

Think of the strategic plan as a long-term investment in the funds.  Part of the board’s oversight would include due diligence on the costs of success, how much money is available, what resources are available and what length of time is required to move the needle.  In today’s world where fee compression has squeezed profit margins and manager participation costs at intermediaries have skyrocketed, boards need to monitor fund expenses and ensure that management is adequately handling all aspects of distribution effectively and efficiently.  

As distribution has evolved over the last 30 years, the value gained from a small, well-qualified relationship management team has outreached the traditional wholesaling model.  With more and more intermediaries focusing their capabilities through discretionary model management, a talented relationship manager can affect far more assets within a firm by covering the professional buyers on the product selection teams for preferred lists and model portfolios than a wholesaler ever could by calling on advisers at point of sale.  As broker-dealers are working harder than ever to control more of the asset base through discretionary platforms, wholesalers have evolved away from the product discussion towards a model of value-added conversations around how advisers manage their business.   

Today’s market has only served to accelerate what had been the gradual evolution away from the traditional wholesaler model for mutual fund firms.  The unique expertise and capabilities of a manager will only grow in importance as intermediaries become less concerned about how many wholesalers a firm has and more about how an investment style can enhance the total portfolio offering. 

  1. What role should the Board play in driving discussions about fund mergers, acquisitions and liquidations?

Even before the start of the global pandemic and the uncertainty of the markets, firms were forced to evaluate the feasibility of merging portfolios, acquiring assets and even facing inevitable liquidation.  Rather than taking a passive or reactive approach, boards should proactively discuss with the adviser about how it plans to retain assets, attract and grow the investor base, or rationalize away certain products.  Of course, the key to being a valuable board member is to be inquisitive without jumping into action.  It’s not the board’s role to drive business decisions nor to implement tactics, however, it’s completely within the board’s purview to ensure the meeting agendas devote sufficient time to engage with the adviser and dive more deeply into strategy.  In times where advisers are focused on “fighting fires” as well as running the daily business, a board setting is a good opportunity to step back and explore longer-term solutions to support the adviser in tackling today’s problems.

  1. What are the hot regulatory topics with respect to distribution?

Board members can learn a lot from interactions with fund counsel, the Chief Compliance Officer and external resources, including the SEC’s website, legal and audit newsletters, and blogs like ours.  The SEC closely regulates distribution in order to protect shareholders from inappropriate sales practices and misuse of fund assets to bear the cost of certain expenses. 

The regulatory landscape changes every day, so to trying to capture all of the issues is not feasible.  However, some of the hot topics today are:

  • Distribution in guise
  • Transparency into omnibus accounts
  • Share class selection disclosure
  • ETF no-action letter for active management
  • Liquidity management (especially under recent market conditions) and its impact on distribution plans
  • Succession planning and business continuity plans for the asset manager
  • The SEC’s exam priorities for 2020

In conclusion, while boards are not responsible for retention and growth of fund assets, there are questions a board can ask to tee up discussions with management to help ensure long-term success and thus serve the best interests of fund shareholders. 

About the Author

Having served as a board member and fund president, Dina Tantra has a unique perspective on questions boards need to ask management in acting in the best interest of shareholders.  As Co-CEO of Global Rhino, her primary focus is on guiding boards in governance and risk management.  The Executive Team of Global Rhino is a leader in board education given 100% service as board trustees now and over the past decade. 

Global Rhino, recognized as an industry leader in strategic distribution, works with the board and the adviser to perform a strategy review, product assessment and analysis in order to tailor the board discussion on mutual fund distribution.

You can contact her at to find out more about scheduling a board education session customized to best meet your needs.

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