As an asset management firm, American Century Investments manages $100 billion in assets for individuals and institutions mostly across the United States. With approximately 1,800 employees, they have about 1.2 million individual shareholders who deal directly with them as clients. The business is split through three different channels: direct, intermediary, and institutional.
Steve Player: Jon, can you help us to understand the three distribution channels used by American Century by expanding on the clients they support and how you serve them?
Jon Zindel: The direct channel has approximately 1.2 million individual shareholders. Basically, an individual would come directly to us, open up an account, and buy any of our mutual funds. The intermediary channel is where there is an "intermediary" between us and the ultimate client, such as fund supermarkets, brokerages, and financial advisors. The institutional channel is where we will open a separate account. This is primarily a non-mutual funds business, in which we manage a pool of assets for a defined benefit plan or a 401(k) plan for a company or a foundation that has enough money that they can just open a separate account and they don't need to go through a vehicle like a mutual fund.
SP: How does your $100 billion in assets spread across the three channels?
Zindel: 40 percent direct, about 55 percent intermediary, and about 5 percent institutional. Having these different channels allows us to manage money in the best way we can and in the right vehicle for the ultimate investor.
SP: How does the direct business find you? Do you have your own branches?
Zindel: We have only three direct investor centers -- one in Mountain View, Cal., and two in the Kansas City area. The direct business finds us online, through the phone, through media advertisements on the networks, as well as via publications or advertisements in The Wall Street Journal.
SP: What changes in the business have you seen over the past five to ten years that have influenced how you have had to manage finance?
Zindel: That's a broad question. But I would say key change would be in the separation of the pure-play asset management business and sales. When the industry had some of the issues with the scandals (which, by the way, we were not tainted by), some of those were related to the conflicts inherent in having sales as well as investment management within a combined shop.
There has been a separation where firms would move to pure investment management or pure distribution sales, and where they remain combined, their platforms have become open-architecture and open to other non-proprietary funds. Along with that, there's more competition in the mutual fund space. With ETFs [exchange-traded funds] out there and more index-type funds, there's been a separation between what the industry would call "cheap beta" products that track a benchmark and have lower fees since they are not active, and "alpha" products. We're active managers, rather than the cheap beta. But in order to differentiate yourself, you've got to be outperforming the broader market over a long period of time. In other words, fund performance needs to support the extra management fees that you're going to charge to achieve the outperformance of the benchmark over the long term. There are close to 10,000 different mutual funds out there, and it's tough to differentiate. So with that comes competition, pricing pressure, and revenue pressure.
SP: How do you evaluate taking prudent risks, as opposed to dangerous risks, such as have led to the predicament that the subprime credit industry has gotten into recently?
Zindel: I'll address that question from our investment management area. This is not an area that I would plug into every day, but we definitely work together. Understanding risk from an investment management perspective is what that profession does and does very well. Our CIOs are setting up risk parameters for whatever discipline it may be to make sure that on a daily basis the portfolio is staying within the risk parameters that we've stated, we've disclosed, and that we've put out there for our shareholders and clients. This is understanding the risks that the portfolios have and how the CIOs look at the portfolios and the assets that we have under management, because this is how we earn our revenue stream.
SP: By CIO, you mean chief investment officer?
Zindel: Correct. We have a chief investment officer who sits at each one of our investment disciplines. Then we have an overall chief investment officer who coordinates across all of those disciplines.
Those folks are working together on a weekly and sometimes daily basis to coordinate and share ideas. For example, our fixed income side has found that information from the credit desk and the staff that is evaluating credit quality is very useful for an equity investor to use in determining whether it's a buy or a sell for a particular company at a certain point in time.
I will say that our fixed income folks did a great job in navigating through the subprime mess. We had no issues in our money market with SIVs [structured investment vehicles], and they did a great job of really getting out of some of the names and issues six to nine months ago. A lot of our competitors cannot say that. Where we were taking some short-term hits on performance, now it's come back to us. We are very disciplined and keep a long-term focus on the risks that we take on the investment management side and on the payoffs for our shareholders over a long period of time.
We're not a market-timed, short-term-risk firm. We try to tell our shareholders and our investors to focus on the long term, and we'll help them to succeed over the long term.
Now, just like any company in our industry, the broad market and how the broad market operates do impact our assets under management. As we get into planning, one of the toughest things to plan for is broader market calls and how the broader market acts.
We control how we manage the money and generating excess return over a period of time. But just that broader impact if the S&P falls 5 percent on one day or the next -- these are the things that we can't have control over.
SP: You can't control them, but they definitely impact your revenues?
SP: So how do you deal with this kind of volatility when your revenue base is fluctuating and your expense base is not nearly as responsive?
Zindel: This is part of the planning challenge. We try to do scenario planning for different types of market environments, and then make sure we understand our expense structure so that we know which expenses are 100 percent variable. A large percentage of our expenses are based on the market value of our assets under management. For these expenses, we know that if our revenues go down, expenses are going to go down the same proportion. Much of our incentive compensation is also correlated to performance against a benchmark and commissions on sales, which tend to correlate well with our revenue stream over the long term.
This leaves a fixed expense base that we try to plan within. We try to understand the capacity that these areas can handle. It's like a scale where fixed expenses could scale up to a much larger amount of assets under management, without having to increase those fixed expenses as rapidly.
SP: I understand you use a PeopleSoft ABM system for aggressively using activity-based analysis. How do you use that to understand how to run the business?
Zindel: It's twofold. One is a regulatory reason. We've got an activity-based costing system to support our annual negotiations with our mutual fund boards.
It's a highly regulated business. The mutual funds have a separate board of directors that governs the contracts that we have with them.
Every year, mutual fund boards need to go through a process that's called the 15-c process. We renew our contracts annually with the mutual fund board. We go through a process so that they (1) can understand on a fund-by-fund basis what fees are charged and the related profitability; and (2) understand that the services they are receiving for those fees are appropriate. Essentially, they validate that they are getting a good value for the money that the shareholders are paying on their assets under management.
It's not just profitability. Profitability is only one element of that review process.
The activity-based management system really supports that process of determining, and helping us look at, the profitability on a fund-by-fund basis.
We also use that same system to review new products and how much in assets under management we would need in a new product in order to hit the margin that we want to achieve as a business. How much up-front cost, and what is the time period before we get to that payoff? We use the activity-based management system to help frame that conversation for us internally, and then determine which products we're going to invest in and roll out, and which ones we aren't going to.
We try to use it proactively for new products rolling out, and then retroactively for the 15-c review process. On the broader business management side, we use the system to make sure that we understand the channels because each one has different profitability characteristics and different expense structures. For example, the direct business has a higher percentage of fixed infrastructure costs. There's a higher price of entry into that market, but it's also scalable.
Now, on the intermediary side, the way it works is that since somebody else is doing the servicing on that business, we pay a percent of assets under management to that intermediary. Let's just use 1 percent as an example. We'll earn 1 percent, and we'll pay out 0.3 percent or 30% of it to the intermediary to service that business.
The institutional business has even more different characteristics due to the non-mutual fund business. We use activity-based management really to understand those three different channels better, to determine if we have a choice where we might want to roll a product out or might want to invest in order to achieve the best longer-term returns for our management company's shareholders as well.
SP: You've had this system up quite a while, I believe …
Zindel: Yeah, we've been using it for a decade, and it's been very useful. It's been very integral to the annual management fee renewal process. This is just a crucial system for us and a large portion of that annual fee negotiation process.
The next step that we're looking at for this system is to evolve more toward the planning inside. Right now, we're using elements of the system by looking at the output and the details from that system to do product analysis, to understand what the drivers of profitability are for a channel or product.
What we would like to do is more broadly use activity-based management, and move more toward an adaptive planning process so that we can understand how changes to certain drivers impact our overall business.
I envision this as a more sophisticated process in which you can take broader market impacts into account, as well as specific things for our business. We seek an understanding of the specific drivers for our business, as well as the broader market drivers for the economy, and trying to turn that -- our scenario plan that we have right now -- into a more sophisticated one, and being able to update it and react more on a quarterly basis.
SP: Activity analysis also helps you to define who is using what, and to get an activity-based approach to organization?
Zindel: Absolutely. What we've just gone through is a re-organization within the firm. We've gone to a more matrix type of organization. We have our service groups centralized now, and I really see the dialogue between the departments becoming even more meaningful moving forward.
I can sit in front of the head of sales and say, "Here is what it costs to do X, Y, and Z." He or she can comment and say, "Well, do I really need that? Why does it cost me that much?" I can get a conversation hopefully occurring between the business areas to make sure that at the end of the day, we're utilizing our resources effectively.
It's not about cutting costs or anything draconian like that. It's more, "Are we getting the most benefit out of the resources that we're spending?" If you can have the data to put it in front of someone, then those conversations can start. If you don't have the data, then you're just going off conjecture, or you're going off some type of theory, and we're trying to make it more concrete for our folks.
SP: Jon, you're going to be coming up fairly quickly on your first-year anniversary as CFO. What things have you been able to affect, and what's still on your agenda?
Zindel: I've got a lot of things on my agenda. I'll start with adaptive planning (our approach to moving Beyond Budgeting). One thing that we've spent a lot of time making sure that we understand and are going to get right is getting as much overlap in synergy between our finance systems as we can.
How are data and information delivered outside of the finance group right now? How do people want to interact with us and get that information and that understanding? Then, based on that, we've got a plan that's coming out now to start delivering financial information to the hands of our business leaders in a better way, and quicker.
Now we're using some tools from Oracle, and really trying to link -- now that Oracle has bought PeopleSoft -- to link the data structures in our financial systems in such a way that we can be more efficient in getting data out so that we can make better decisions.
Business performance analytics is where we're heading. But the first thing to do was to make sure that we understand what we've got, what it does, what it can't do, and then that gives us a road map to say, "Well, this is where we want to end up."
We spent a lot of time doing that this year in the finance operations process. I've really been pushing my folks to understand the processes, document the processes, understand where the data comes from, where it goes, and what it's used for, with the whole goal, of course, of trying to leverage our systems better, get our people to do more analysis, and provide better information out to the business to enable better decisions.
I want to free up time for those folks to make better decisions based on a sound financial footing. And that is going to roll into getting better at adaptive planning.
Right now, we have an annual budget process that we go through, which I would like to evolve toward a quarterly review of the business, focusing on the future and the things that have changed. Then you really enter into a dialogue with the business so that we can adapt and make changes as the world around us changes.
As you know, Steve, a budget becomes stale on the first day of the next year, and that's really at top of mind what I'm trying to introduce within my group and within the company. This will be a gradual introduction, but with an understanding of my team of where we want to get to: introducing new things to the planning process and to that analysis throughout the year. That's where we're going: more adaptive planning, quarterly reviews of the business, and really making decisions in real time, and then being able to show what the impact of those decisions might be out into the future, right at that point in time.
That's where we want to get to, and we just need to make sure that we've got the systems there to support that, and the knowledge within my folks to get there.
SP: What surprised you the most during your first year?
Zindel: I would say just the scope and the impact -- the expertise that finance professionals hold within their groups, and the impact that can be made from releasing that expertise into the organization. The organization really wants that knowledge from a financial standpoint.
So, never assume everyone understands how a business works, or how their financials work, or how their cost structure works. Really make an effort to get out there, form the relationships, and have the dialogues. Because what I've found is that a lot of good things come out of those types of conversations.
SP: Was it tough for people to understand the keys of how you make money? How you really run the business?
Zindel: The fact is, the business leaders with whom you're interfacing and working want the same outcomes that you want. At the end of the day, if the leaders are aligned, and you've got the right incentive structures in place, everybody's incented to make the right decision for the same reason.
It's getting to that point where everybody is in alignment to say, "Yes, we're going to make the best decision for the overall company." And finance organizations have the ability to see across the company in such a way that they can help. They can help facilitate those discussions and help facilitate getting to that point.