The city of Chicago is known for having some seriously cold weather that can surprise visitors with it’s intensity. While October is far from the dead of winter, the average temperature has historically been in the high 50’s/low 60’s with a fair dose of wind to chill your bones.
Fortunately, a few days of absolutely beautiful weather arrived in the Midwest just in time for the Money Management Institute’s 2017 Annual Conference, which was held October 2-4.
Hiding from the bright sunshine inside the Swissotel were members of a panel on asset management called, 2027: What Will the Advisory Solutions Product Shelf Look Like? The panelists gave their opinions on how they see the next 3-5 years being impacted by demographics, regulatory and technology.
This panel had an excellent mix of very opinionated people, which is the right way to create an interesting and lively discussion that won’t put the audience to sleep!
Moderator: Yanni Bousnakis, Head of Investment Solutions, Cetera Financial Group
- Adam Antoniades, President, Cetera Financial Group
- John Moninger, Managing Director, Retail Sales, Eaton Vance
- Daniel Needham, CIO, Morningstar
This session considered factors influencing asset management such as: the evolution of SMAs, mutual funds, ETFs, and alternative investments; trends in discretion; the advent of new benchmark-agnostic products that focus on outcomes; risk management and the need for predictable streams of return; and how Clean Shares may change the landscape of distribution relationships.
Current Asset Management Trends
Craig’s note: Fee compression has impacted every part of the wealth management food chain, except for financial advisors. No one wants to touch them, since they are the tip of the spear for selling products and delivering investible assets order flow to their broker-dealers and/or custodians.
There are a number of trends challenging the core value proposition that advisors bring to the market, according to Antoniades. These trends are highlighting the misalignment between the advisor’s value and what they are paid. Most advisors think they are paid for advice and for creating wealth, while many broker-dealers (like Cetera) think they are paid for selling products. As an industry, we have done an injustice to advisors by not investing the time to educated clients about their value and justify their compensation, he believes.
Asset managers must improve their client experience and do a better job informing advisors about progress towards their clients’ goals and objectives, Moninger proposed. It is important they they substantiate the value trade by moving from selling product to providing services that improve their client’s lives.
Morningstar’s Needham believes that the online payment space will bring new innovations, except that no one knows exactly what they will be. He related a saying from Charlie Munger, Vice Chairman of Berkshire Hathaway:
Anyone who thinks they understand what consumer payments will look like 10 years from now is deluding themselves.
Online payment platforms such as PayPal, Alipay (from Alibaba Group) or Apple Pay have non-linear payoffs for their owners and have initiated a structural change in technology. The challenge for asset managers is avoiding the belief that the future will be just like the present, he challenged.
The expanding global regulatory frameworks will continue to expand around financial services. While regulations hinder banks and insurers by forcing them to abandon proprietary investing and other core businesses, this will be a net benefit to asset managers, Needham stressed.
The global consultancy PricewaterhouseCoopers put out a research report that predicted that by 2020, additional regulations will hinder banks and insurers by forcing them to abandon proprietary investing and other core businesses, driving investors to asset managers.
Regulation creates barriers to entry, which is a positive, but also lulls us into a false sense of security, which makes us easy targets for innovative startups, Needham warned.
Asset management is basically a private sector solution for the government problem of how to insure against the tail risk when people retire, Needham observed. If the industry can’t deliver solutions, the govt will step in. More crisis will create more regulation. The US is still the least regulated post-financial crisis vs UK, EU, Australia?
Needham suggested that passive management is not actually all that passive ands that it should be referred to as “The Rise of Active Asset Allocation”. He noted that the turnover ratio of ETFs is 880% annualized compared to just 120% for equities. This disparity demonstrates that ETFs are being used as a trading instrument rather than as passive investments, he noted.
Uniformed day traders who chase after hot stocks without regard for their fundamentals used to be referred to as “noise traders”, Needham pointed out.
Now we have “noise allocators” who trade solely on their internal models, not on fundamentals and they are failing, Needham claimed. And as these less-skilled managers leave the business, the paradox of skills is invoked, since the ones who are left are, by process of elimination, of higher and higher skill levels, yet may not have more success since they have to compete against each other, he observed.
The “B” Word
Relative to the broker-dealer and RIA business models, firms have allowed themselves to be defined by their regulatory structure, rather than on their delivery of value to advisors and consumers, Antoniades warned. Those that can make the successful journey to an advice-centric model from product-centric will be more successful at protecting their revenue base, he insisted.
Cetera has banned the use of the word “broker-dealer,” Antoniades claimed. The use of the “B” word contributes to the wrong kind of thinking, he believes. If they think they are just a broker-dealer rather than a full-service wealth management provider, they are more likely to fall back to the lowest common denominator of regulatory structure and increase their risk of being disintermediated.
“We need to evolve and advice needs to evolve, [because] ten years from now there won’t be any broker-dealers left in the market. And we’re looking forward to it, since then we will all be judged on the value we bring.” — Adam Antoniades, President, Cetera Financial Group
The vast majority of custodians’ revenue comes from asset management and lending and not processing or trading, Antoniades explained. Yet, many custodians still hold onto the idea that there is value in processing. Processing will be the area that will see prices compressed most aggressively and commoditized most aggressively, he predicted.
Antoniades brought up the example of when Schwab cut ticket charges back in February and Fidelity and TD Ameritrade quickly followed suite. TD Ameritrade’s share price took a significant hit due to the expected drop in revenue, he explained.
A recent industry report by HSBC called Custody in 2025 concurs with Antoniades’ prediction:
Custody responsibilities will be segregated into processing and servicing. Processing will be commoditized and low margin. It will not be limited to custodians and could be handled by specialist providers or industry utilities.
How are we best serviced by open custody architecture?
The cost of processing is synthetically or otherwise going to zero, Antoniades predicted. The real value is in other capabilities, he proposed.
The asset management pricing model is problematic, Moninger declared. An asset manager should be more thoughtful about their prices and do their best to lower them, he suggested.
Inflation on the cost of distribution is going up and will be exacerbated by Clean Shares coming onto the market, Moninger warned. Broker-dealers are being squeezed by fee compression, but advisors haven’t shared in the burden or the costs of doing business, he noted.
Many sponsors require asset managers to reduce their fees in order to get onto their platform. But only the sponsor benefits from this cost reduction. Why isn’t anyone asking mutual fund companies to lower their expenses?
While mutual fund prices have come down, they could be coming down faster, Moninger pointed out.
Asset managers are facing a tough road, Needham stated. Their renumeration structures are changing, while the number of active managers has declined and passive managers have increased. Asset managers will have to think about what their products will look like ten years from now, he stressed.
Challenge: The industry is moving towards a multi-asset goals-based solution where overall strategy is more important that individual products.
Craig’s note: Goals-based investing has been trend for a number of years as advisors look for ways to enhance the client experience and improve outcomes. But some advisors also see goals-based as a way to avoid having the uncomfortable conversation when a client’s portfolio is lagging behind the market.
Should asset managers embrace goals-based reporting or is it just a smoke screen for the ones who haven’t beaten their benchmarks?
Investors don’t care about benchmarks, Moninger declared, they are more concerned with their ability to retirement. While regulators require that a benchmark be included on all client statements, it should be equally important to deliver statements to clients that they actually understand. Should we be outperforming a benchmark or client goals?, he asked.
We want to relegate performance reporting to a part of the client portal that can’t found, Antoniades admonished. It gives the impression that we can drive Alpha when we really can’t, he cautioned.
Every manager should create a process that helps inform and anticipate future client challenges, Antoniades recommended. Planning doesn’t matter, because the way it’s architected is a waste of time. Define measures of success as they relate to each clients’ well-being and define how well you have helped them to reach that goal, he insisted.
In a principal/agent situation, the individual investor is the principal, the financial advisor is the agent and the asset manager is the agent’s agent, Needham explained. The asset manager must be held to account if they do not beat their benchmarks, he insisted.
Is There a Conflict Between a Manager’s Fiduciary and Shareholder Duties?
Craig’s note: This was another interesting portion of the discussion. How to publicly traded asset managers balance their fiduciary duty to their clients with their duty to their shareholders? For example, decreasing fund expenses would be good for clients, but not so good for shareholders.
As investment products evolve to provide a better level of predictability versus assigned goals, analysts will become more focused on them, Antoniades projected. Product structure has a lot to do with outcomes and as more complexity enters the market, with more claims of predictability, the more analysis will be required, he pointed out.
Large segments of the industry believe that advisors can drive Alpha through their own investment management, Antoniades stated. In fact, allocation models that are controlled by advisors acting as the portfolio managers (APM) is the dominant fee-based structure, he noted. This raises the unusual possibility of an advisor (acting as a fiduciary) having to fire themselves due to poor performance!
The asset management industry has not done a good job of managing the tradeoff between profit and putting the beneficiaries’ interests ahead of their own, Needham suggested. Managing people’s life savings is not like selling shoes. You can’t get a refund if you’re not satisfied!
Smaller a/m firms that close early that are owned by their investors are doing it right. Finplan firms that charge fixed fees. Vanguard has got it right because the corporate entity is owned b their investors.
Asset Management Trends
There are many opportunities for asset managers to provide added value to their clients. It is important to keep searching for these and implementing them to keep clients happy. If not, someone from the outside will do so.
Whether it is fiduciary conflicts, benchmarks versus goals, the role of custodians, active versus passive, or helping to communicate advisor value to clients, the asset management industry has a host of challenges ahead. There is also the possibility of Internet giants such as Google, Amazon or Facebook moving into the space and hoovering up millions of clients with low cost or even free services.
Asset managers must get their houses in order and plan for the future before it arrives with a nasty shock.
Do you have questions about technology for asset managers, custodians or RIA’s? Ezra Group should be your first call. We are the preferred consulting provider for wealth management firms looking for objective technology advice delivered by industry professionals. For more information, contact us at Consulting@EzraGroupLLC.com