Net Promoters: The Best Marketing Money Can’t Buy
February 8, 2016
by Jeffrey Briskin
In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More
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It’s not easy being a fund company these days. With most actively managed funds failing to consistently beat their benchmarks, brand loyalty among advisors has become increasingly elusive.
Advisors recommend individual funds that meet their specific due-diligence criteria. But they will become net promoters for fund companies they believe offer superior characteristics or benefits in addition to good performance. These advisors will highly recommend these firms’ products to their clients and to their peers. This word-of-mouth advocacy is the most effective marketing tool that money can’t buy.
The concept of net promoters comes from the science of market research. In 2004, Bain & Company introduced the net promoter score (NPS) to measure the level of loyalty between customers and vendors. In Bain’s methodology, the NPS is based on consumers’ responses to the question, “How likely are you to recommend our company/product/service to a friend or colleague?” Responses are usually measured on a scale of 1 to 10, where 10 is most likely.
Research has shown that companies with strong NPS ratings generally experience revenue growth and consumers are more likely to recommend these companies to others.
Which fund companies have the most “advisor net promoters”?
Fund companies pay independent research firms millions of dollars a year to find out how they compare to their peers in terms of brand loyalty. I certainly don’t have the definitive answer to that question, but the preliminary results from two questions in a reader survey Advisor Perspectives conducted in December 2015 offer some insights.
In the survey, we asked advisors to choose which of the 40 largest fund companies (in terms of AUM) they would recommend to their clients. Respondents could choose multiple companies. Two hundred forty two respondents answered this question. While this number isn’t large enough to be statistically significant, the results offer anecdotal insights that merit further research.
Three firms received far more “recommendations” than their competitors: Vanguard, American Funds and BlackRock.
The survey also asked advisors to “write in” the name of the one fund company they would recommend to other advisors. Of the 118 who responded, more than half chose either American Funds or Vanguard. Dimensional Fund Advisors (DFA) came in third, with 12 votes. No other company earned more than five votes.
The characteristics of highly recommended fund companies
Because our survey covered many other topics, we didn’t specifically ask advisors why they recommended certain fund companies (this will be the subject of future research). But in some cases the reasons are not difficult to infer.
Vanguard has become the company of choice for advisors and investors seeking low-cost pure index funds, yet a number of its actively managed funds have also delivered strong performance. Likewise, over the past decade, American Funds has leveraged its reputation for cost effectiveness and solid returns to vault past many other fund complexes. BlackRock is highly respected for its risk management processes and its breadth of products, including its family of ETFs.
Many of the most recommended fund companies benefit from having extensive distribution networks within RIA firms, wirehouses and independent broker dealers. Yet, one firm demonstrates how brand loyalty can be built even when access is limited.
Our third place “advisor-to-advisor” winner, DFA, was also one of the funds advisors recommended most highly to their clients. DFA has built one of the most dedicated communities of net promoters by delivering solid returns based on its academic research-based investment approach. The firm has grown to become one of the largest fund companies in spite of the fact that it does no advertising and only allows advisors who meet their strict qualification criteria to sell their funds.
Of course, there may be other reasons why advisors recommend fund companies. For example, commission-based advisors may favor firms that offer share classes with higher sales loads and 12b-1 fees. Others may recommend fund companies that their clients are familiar with or whose brand connotes value or exclusivity.
How can fund companies turn more advisors into net promoters?
Most advisors recommend individual funds that offer good performance, lower costs or a combination of both. But generally, only a small number of a firm’s funds will consistently outperform their benchmark over time. In an industry where losers greatly outnumber winners, what other means can fund companies use to build loyalty? Here are several suggestions.
Offer excellent information and sales resources
According to our research, nearly two thirds of advisors primarily conduct fund diligence using third-party research organizations such as Morningstar. Yet, many also rely on fund companies for additional educational resources and sales tools. Nearly 40% of advisors still work with fund wholesalers, and 32% get fund-related information and commentaries from fund company websites.
Offering advisors a robust online experience can also help build brand loyalty. Nearly a third of survey respondents said that the quality of a fund company’s online resources is as important as other resources in shaping their overall impressions of that company.
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