The alternative investments sales cycle for RIAs got longer but marketing patience got shorter

Brooke’s Note: There’s a bit of a cloud hanging over alternative investments. In the recent downturn, many hedge funds and private equity investments proved to be far too correlated with the general stock market. Considering their illiquid nature, hefty fees and opaque nature, it shouldn’t be surprising to hear that investors, and the RIAs who invest on their behalf, are asking hard questions. What Shawn Paulk reveals in this column is that the people who market these funds haven’t made much of an adjustment to this new reality. That’s a shame. Some of the most talented, hard-working people in the industry produce excellent alternative investments for the investing public. But their efforts are for naught if the sales process is of lesser quality. Good RIAs are stepping it up in this investing environment and apparently people in the hedge funds and private equity realm need to do the same.

A large RIA practice recently told us a story about a salesperson from a very large, well-known asset manager coming to see them. After sitting down with the advisor, the salesman proceeded to take an incoming call on his cell phone. He followed that up with another call, this one to his inside sales partner to ask what he was supposed to be “selling” to this advisor.

Needless to say, the sales presentation wasn’t successful. While this is an extreme example, it does illustrate a phenomenon that is becoming more common: the sales rep ill-prepared for the current complex environment of the RIA channel. If you plan to fish in that still-rich stream, the lesson is to take some care with your planning.

TIMING

We hear this question frequently: “We know our alternative strategy has legs – how quickly do you think we can raise capital?”

Determining the expected length of the sales cycle within the registered investment advisor channel has never been an exact science. Even so, over time experienced investment managers and their sales teams have developed an understanding of the general norms and timeframes required to position their products and services.

But now, particularly in the alternative arena, what was familiar is no longer necessarily true. The sales cycle is now taking much longer. To make things a bit more interesting, we are operating in a time when investment management firm resources are stretched thin. Inflows are the top priority.

One reaction by investment managers faced with operating in this new environment may be to search for ways to fast-track the sales cycle. But this approach is the product of short-term tactical thinking done at the expense of long-term strategy. Accessing the RIA channel takes time, patience and a calculated approach.

EVALUATE THE LANDSCAPE

Successful managers should focus on finding Registered Investment Advisors with the level of interest and resources that are the best fit with their products and strategies, then zero in on providing those RIAs with the tools they need to make fully informed investment decisions for their clients.

Registered Investment Advisors have been caught in a perfect storm of cycle-lengthening factors.

Many RIA practices focus on high net worth (HNW) individuals–and HNW clients are under stress. Although they may believe there are investment opportunities to be found, a full 68% of HNW investors fear the risk of a further drop in asset prices is too great to take advantage of those opportunities. That’s according to a June article titled Wealthy Investors Unwilling to Pursue Opportunities in Fear of Further Price Falls on the Barclays Wealth website.

In addition, the advisor landscape itself is changing. Assets under management by SEC-registered investment advisors, including those in the broker-dealer channel, shrank 20% in 2008, according to Financial Advisor magazine. While this amount has rebounded with the market, many advisors have been faced with sinking fee-based revenues. At the same time, the advisor community became more crowded as the overall number of advisors increased.

As they face intensifying competition from advisors migrating from other channels, particularly wirehouses, RIAs are also dealing with the certainty of more regulation, accompanied by the uncertainty of exactly what form that regulation will take. Because of the fiduciary nature of their profession, advisors are already focused on issues such as position transparency, costs and leverage. They now approach due diligence with even more vigor.

OPPORTUNITIES

RIAs find themselves caught between the rising tides of increasing regulation, competition and client stress. They also realize that in spite of the turbulent waters of the past couple of years, as investors regain their equilibrium, they will need and seek professional financial advice in earnest.

As a result, many advisors are open to new solutions for risk reduction or return enhancement, including alternative investments. In our recent conversations with advisors, roughly 60% are either already using alternative investments or are open to the concept of using them in their clients’ portfolios.

The fact that advisors are taking a fresh look at alternatives is good news for managers that operate in that space. It is critical, however that managers understand, respond and above all else listen to advisors’ needs if they want to take advantage of this opportunity.

WHAT ADVISORS WANT

To successfully target the RIA business, managers must offer strategies that meet the specific parameters set by advisors and their clients. A Morningstar, Inc. and Barron’s magazine survey of advisors, the November 2009 Alternatives Survey, shows that features like redemption gates, redemption fees and even capital calls may be met with resistance.

On the other hand, advisors are much more receptive when alternative investments are transparent, which means they will be looking for frequent valuations, holdings transparency, third-party audit reports, detailed explanations of how money is routed and complete due diligence on operational controls.

Liquidity guarantees are also high on the list of desired features, according to the survey. While there is still demand for the traditional private placement Reg D offerings with RIAs, we are seeing more advisors considering alternative solutions that are relatively liquid, specifically in the mutual fund and ETF arenas.

TIPS FOR REACHING THE ADVISOR CHANNEL

Finding RIAs

Once product issues are addressed–which means you have an offering that brings real value to RIAs and their clients–reaching the advisor channel requires a highly calibrated strategy. The successful asset manager will recognize what advisors need from them now, which is a partnership, not a sales pitch. If you cannot accomplish this, you will probably find yourself shut out early in the process. There are, however, some specific approaches that managers can use that will improve the likelihood of being well received in the RIA channel.

Know Your Audience

Seek first to understand: use expert listening skills to inquire about advisors’ practices, their clients and their challenges. Understanding an RIA’s portfolios before you launch into your strategies is paramount and will serve two purposes. First, it is a more efficient use of your resources.

Good listening during the qualifying stage will ensure you are in the right offices at the right times. Second, it will set you apart from the pack. We routinely hear from advisors that wholesalers and managers walk through their door unaware of the advisor’s investment philosophy and needs.

To know the RIA audience is to understand that they do not sell products to their clients– and they don’t care to be “sold” to either. They provide objective advice to their clients, for which they charge a fee. An investment manager positioning an offering to RIAs without an awareness of, and respect for, the basic differences between this channel and the wirehouse community is setting the stage for failure.

Keep in mind also that advisors are busier than they have ever been. Your call is just one of a tidal wave of “touches” that they receive in a given month, from both existing and prospective providers. It may seem like a simple thing, but advisors need to be communicated with in a way that is effective and convenient for them, not via the method that works best for your sales team. Many RIAs tend to prefer online communication like emails and webinars over some of the more traditional methods such as phone calls.

Add real value

Bringing value to registered investment advisors goes well beyond slick marketing materials, pitchbooks and a nice website. Some innovative managers are adding more to their RIA relationships by offering continuing education opportunities (both in-person and through webinars), often with CE credits available. Others produce extensive collections of white papers or research in specific areas of expertise, offer practice management ideas culled from leading firms across the country or issue regular economic commentary from leading executives.

Some managers go to great lengths to assist their RIA firms in organizing client appreciation events and dinners, utilizing specific portfolio managers or executives from their companies. Look for ways to add genuine value as you enter this highly sophisticated market.

Build relationships

Because of the increasing demand for the attention and time of RIAs, the value of an existing, trust-based relationship between advisors and distributors is immense, and hard to quantify. Here is where the contribution of an experienced sales force, well-versed in both your offerings and the RIA channel, will be critical. Advisors build strong, trust-based relationships with their own clients. Similarly, their strongest relationships with their key investment managers will be built on a similar foundation.

Adjust expectations

After putting into practice all of the advisor-friendly strategies you have at your disposal, adjust your own expectations. Allow for the additional time and resources needed to complete the sales cycle, including the due diligence that the RIA will require. For instance, we find an increasing number of advisors are interested in onsite visits and an in-depth look at manager infrastructure. Be prepared to offer and facilitate this level of transparency and due diligence.

Putting it all together

While the length of the sales cycle may have changed, the process itself still exists. It still works; it is not broken. In the Registered Investment Advisor channel there is no substitute for the effort that goes into the relationship and trust building process.

Fine tune your story, offer significant value to advisors and their clients, and be prepared to invest the time and resources needed to make the sales cycle effective. The good news is that there is a correlation between this effort and success. The rewards for patience, meticulous attention and careful planning can be great.

Shawn Paulk has worked closely with Registered Investment Advisor firms for over 12 years and is the former Head of Advisor Distribution at TIAA-CREF Asset Management. He is the current President and Founder of Bonefish Advisor Strategies in Charlotte, NC. Shawn can be reached at spaulk@bonefishadvisor.com. A copy of the full paper The RIA Sales Cycle: Positioning Alternatives with Registered Investment Advisors is available here.