Today’s Headlines and Tomorrow’s Trends: A Look at the Industry from the Viewpoints of Broker-Dealers and Asset Managers
Nicsa members explored the here and now with an eye toward the future during the 2022 Strategic Leadership Forum (SLF) on March 30. The two-part session gave attendees the perspectives of both broker-dealers and asset managers with separate segments moderated by Sandy Bolton, Senior Advisor, FS Investments, and John Cooper, Former Head of Distribution, Morgan Stanley.
THE BROKER-DEALER PERSPECTIVE
Bolton gave attendees a look at the industry through the broker-dealer lens with a panel featuring thought leaders from Morgan Stanley, Edward Jones, and Merrill Lynch.
Mutual Fund Wrap Programs
When asked about mutual fund wrap programs, David Rosen, Managing Director, Head of Traditional Investment Products, Morgan Stanley, said that in five to 10 years, his firm aims to offer an array of strategies across every structure.
“Let the advisor, let the client pick and choose which structure fits their needs the best,” Rosen said. “Today, we certainly want to encourage innovation with our partners. We are seeing substantial growth across both separately managed accounts (SMAs) and exchange-traded funds (ETFs). We have about 700 SMA and 1,400 mutual fund strategies on the platform today, so there’s a big delta between the two. Ideally, for every mutual fund we offer, we want to have an SMA version available, assuming it's suitable within the structure.”
Steve Rueschhoff, Principal, Edward Jones, said his firm is delving into the active ETF space. “We think it’s a trend that's here to stay,” he said. “There is definitely unique client value there; there can be tax efficiency, and there can be cost structure advantages.”
However, scenarios in which there are different transaction costs for a fund versus an ETF can add complexity to recommendations — and potential for tradeoffs and conflicts, Rueschhoff said. “We made a policy decision last summer that we will have active ETFs available but only on fee-based platforms, where we are agnostic to transaction costs,” he said.
But this isn’t the end of the mutual fund, Rosen said. “The reality is, there will always be value in the wrapper, and certain strategies won't work in ETFs or SMAs. Certainly, you will start to see more development on the ETF side and strategies that make more sense for that wrapper.”
Alternative Investments
Rosen said Morgan Stanley has seen tremendous growth across its alternative investment platforms that is diverse across wrappers.
“There are a few things firms need to think about if they want to get into this business — first and foremost is brand,” he said. “A lot of traditional mutual fund shops have struggled, not all of them, but some have struggled to raise assets, so brand is critically important and being seen as the true alternative.”
Other tips include having a distinct sales team for alternative investments, having a strong track record, and providing education to advisors on the value of the business.
Anna Snider, Head of Due Diligence, CIO Office, Merrill Lynch, said her firm is committed to tripling alternative investment assets in the next few years.
“We are in the middle of a market regime change,” Snider said. “The market of a month ago is no longer here. I think the income-producing product story is here to stay, especially if beta-driven equity returns are more muted than they have been in the past. I am really excited, as someone who has been in alts for a long time, to see democratization open up. I think clients can benefit if they are used correctly, but they require so much educational expertise.”
Snider cautioned that the onus is on everyone to educate clients on risks — for example, in terms of liquidity. “It’s on the firm to ensure the financial adviser understands, it’s on the financial adviser to ensure that the client understands, and at the actual asset manager level, really being clear about all of the risks and the benefits,” she said.
Models
Many firms have recently focused on using models to help advisors scale their businesses. Rueschhoff said Edward Jones believes model adoption is the best course for advisors.
“We are trying to reinforce with our financial advisers that their value in the marketplace is not in stock picking, security selection, or portfolio construction,” he said. “Those things are table stakes, but they are commoditized and free if you know where to look in today's marketplace. Value is found in advisors developing deep personal relationships with clients, really understanding their needs, wants, wishes, and goals, and helping them achieve them. Anything we can do to scale the nuts and bolts of portfolio construction and model building, we want to do.”
Fintech
Rueschhoff started with a discussion about the tools asset managers use to streamline their workflows: “In spite of the fact that they are great tools, just taking them and introducing them into our system
creates challenges for us,” he said. “One is when you think about the governance or risk of vetting all the software … there’s an endless list of things, so be patient with us.”
As far as internal investments go, Edward Jones has publicly stated that it will invest more than a billion dollars in technology over the next 18 months. “We are making significant investments in that space right now, particularly in CRM software, financial planning software, and certainly portfolio customization
on the advisory side.”
THE ASSET MANAGER PERSPECTIVE
John Cooper, Former Head of Distribution, Morgan Stanley, gave attendees a look at the industry through the asset manager lens with a panel featuring thought-leaders from Thornburg, Invesco, and Franklin Templeton Distributors, Inc.
Mutual Fund Wrap Programs
When it comes to active and passive ETFs, Clint Harris, Head of Wealth Management Platforms and Global Consulting, Invesco, said the fully transparent wrapper may ultimately win the day.
“We have been in the fully transparent space at Invesco for 16 years. We have 15 active ETFs; four are fully transparent and relatively new,” Harris said. “As we have incubated those semi-transparent wrappers over the last couple of years, it has been positive, but I also think that we have gotten a lot more comfortable with a fully transparent structure.”
Harris said that putting an active product in a different wrapper will not necessarily make it more appealing to a client. “If a product’s not selling in a mutual fund, you are not going to put it in an ETF wrapper and suddenly it’s going to sell. The value proposition has to be there for the client.”
Roger Paradiso, Head of Product Solutions, Franklin Templeton Distributors, Inc., touched on the time and effort that goes into mutual fund conversions.
“At some point in the future it may become a simpler process, one that is going to make more sense, but at this time ... most of the new product development is happening in the ETF space, not in mutual funds.”
Alternative Investments
Harris said that conversations about alternative investments have begun to dwarf the others he’s having with major firms. Most interesting to him are not the products — but the delivery.
“I feel that the back end, the post-investment operational element, is ripe for disruption and an improved client experience,” Harris said. “A lot of my conversations right now are about how to bring private market capability on [block]chain so that you can leverage distributive ledger technologies to improve the operational efficiency, create a better client experience, and take a lot of the pain out of the administration of private markets. When you do that, then you’re going to scale.”
Paradiso said Franklin Templeton is all-in when it comes to alternative investments; it's a billion-dollar business for the firm.
“It’s a growing area within Franklin Templeton — a very focused area, and an exciting one that is starting to take hold — and it happens from liquid alts all the way up to the private placement world,
and everything in between.”
Models
Erin Carney, Head of Strategic Development, Thornburg, said her firm specializes in international and global equities, global fixed income, and multi-asset solutions.
“As we have thought about creating models, we would have to involve third parties with passive solutions, et cetera, and that is potentially interesting for us,” Carney said. “Where we have effectively created them is in multi-asset solutions. We have an income-based, multi-asset solution and real return-tilted multi-asset solution that is a little bit newer.”
“We are more likely to be a component of other people's models as a third-party participant, in part because the investment strategies that we have created tend to be highly active, focused, and produce different outcomes,” Carney continued. “So if you put them in a portfolio context, they will help the overall asset allocation that way, because it is a different idiosyncratic outcome for clients overall.”
Fintech
Carney said Thornburg has dedicated a tremendous amount of time and capital to fintech over the last six years.
“It’s starting to become incorporated into the fabric of Thornburg — in how we approach clients and how we serve up content that is important to advisors, or anyone that approaches our website, in meaningful ways. We want them to become more engaged with who we are, what we’re doing, what our ideas are, and how our investments reflect that.”
Harris observed that fintech themes spanned nearly all topics discussed during the two-part Nicsa event that day, from managed accounts and customization to alternative investments.
“As very regulated businesses, I do not know that you will always get the most out-of-the-box thinking inside your firm to be as disruptive as you need to, considering the problems we are trying to solve,” he said. “That is why you are seeing firms make [tech] acquisitions — you are buying the intellectual freedom and capital from outside the organization and trying to bring it in.”
May contain forward-looking statements subject to various uncertainties. Personal views and observations of individuals contained herein are as of the date of the live event or written material and do not necessarily reflect the views of Nicsa or its member organizations. Nothing herein is intended to be or should be construed as legal advice. Contact your own counsel in order to obtain legal advice regarding these or any other matters. The information contained herein is for informational purposes only and does not constitute a recommendation of best practices.
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