Pursued by Wholesalers

(I recently read Josh Brown’s Backstage Wall Street. Rather than write a plain boring review, I thought I’d talk about a few points in the book that I enjoyed and can relate to.)

Chapter 10 in Backstage Wall Street is “Wholesalers and the Brokers Who Love Them.” Here’s a quick rundown on who wholesalers are and my experience working with (and avoiding) them.

Fund wholesalers are employed by the mutual fund companies to encourage financial advisors to sell their products to clients.  They come into advisors’ offices with boxes of sales literature and fantastical stories of fund managers, trading strategies and analyst research (“boots on the ground,” as if they are the only investment company with global research analysts).

At an office with significant client investment assets, wholesalers are eager, bordering on desperate, to have a shot at pitching their wares to advisors.  A wholesaler who can land 5% of a $500 million book of client assets will make his year. So they call, have their internal counterpart call, have their secretary call, to get a meeting scheduled. They’ll bring lunch or donuts or offer to go to happy hour after a meeting at the end of the day. They won’t hesitate to drop a few hundred dollars if it gets them the meeting.

As the head of investment research at a prior firm, I spend a great deal of time deflecting these calls. Here’s a few lines I got all the time:

“James, you guys should really take a look at our natural resources play.  What are you using there?  Let me send you some analytics on how we stack up.”

“James, I’ve got to show you our global tactical allocation strategy.  (So-and-so other advisor) down south of you has been using it with great sucess for 12 months now. When can we get together?”

“James, I just emailed you some numbers on our go-anywhere bond fund.  Your clients need this flexible strategy in this low-rate environment.  I’m going to have the portfolio manager in town next week, can we come see you?”

These guys (wholesalers are almost exclusively male) are relentless, always calling with a new “story” that I just “have to see.” Every year, year after year, they have to keep aggressively pushing their funds.  Most wholesalers work primarily on commissions and are only paid on new assets, so they need more and more of my client’s money to be in their funds every year.  They also have access to the fund complex’s marketing budget, which means paying for client dinners, seminars and marketing events in an effort to curry favor with the advisor.

I don’t want to rag on any individual wholesaler.  Some of the them are great guys.  Most have a family they are trying to provide for.  Like many of us have been, they are just a piece of the gigantic mutual fund marketing machine.  They simply have the unfortunately role of being the face of that marketing machine.

But the fact is, they’re all pushing the same swill.  They all have a “great” core/small cap/international/emerging markets/natural resources/real estate/commodities/alternative/tactical/inflation-hedged/multi-asset/EM debt/absolute return story that I just HAVE to use with my clients.  They employ brilliant managers and analysts, all of them MBAs and CFAs.  They conduct all of their own due dilligence, macro research and fundamental analysis. They have closely-held proprietary trading strategies. But so does every other fund firm on the Street, not to mention every hedge fund, private equity fund and private and institutional account manager. None of this changes the fact that over half of these products are doomed from the start due to fees, trading costs, manager risks and tax drag.

If you own mutual funds in a 401(k) plan or an account managed by an advisor, don’t doubt that a hard sell from a wholesaler had something to do with it.


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