Neil Bathon, founder of FUSE Research Networks, has been on the forefront of research and analysis of the retirement and asset management industries for the last four years.
Money Management Executive recently spoke with Bathon about trends in the mutual fund, exchange-traded fund and 401(k) spaces and why he thinks FUSE is not just another research shop that keeps its clients at arm's length.
Why did you establish the research firm, and how do you differentiate yourself from competing firms?
The team at FUSE did not want to run another generic research business where you simply hand over your findings and hope something good comes from it. We also did not like traditional one-off consulting projects as the level of client engagement was not always very rewarding. So we came up with FUSE which is a "business concierge" (for lack of a better name) that combines ongoing market intelligence with custom consulting support to improve decision making around matters related to the distribution of investment products. The research we do is almost always client-directed and nearly 100% of our clients are on annual retainers.
We get involved with our clients and we help them make decisions that are pretty substantive and impact the future of the firm, so it's not just you subscribe to our reports and we hope that you get something out of them, we're actually intertwined with our clients to the point where we help them get decisions made. I think firms have settled for relationships with their vendors which they don't extract full value from. I'd really like to break them off from the fact that they'll spend a couple hundred thousand dollars on studies and not get anything out of it. They should demand more from their vendors and I'd like to be at the forefront of awakening them.
Overall, my master plan is to be the AMG or Natixis of the service side of the investment business in terms of bringing together firms that have synergy-either through partnership or equity participation. I believe there is a significant opportunity to link vendors in a way that more fully leverages the experience, relationships and insights of each firm for the greater benefit of clients. Some of the capabilities I would like to bring together over the next few years include management consulting, public relations, executive search, marketplace surveys, offshore market intelligence, staff assessment and development and sub-advisory data.
What major trends have you been following closely in the mutual fund space?
The two biggest areas of interest are product-related as firms seek to revamp or create new offerings that will fit into "solutions." We used to sell products almost exclusively on performance. You add a hot fund with a good star rating, you could sell billions of dollars on it. But now, the distributors, advisors, investors want to know how it all fits together and total portfolios and asset allocations, so these one-off product sales of the past are fading pretty quickly. It's much more about asset allocation and portfolio construction.
The hottest topic on the distribution side of the equation is "Rep as PM" which I believe, unless it is accompanied by an incredible amount of hand holding, may well turn out to be one of the biggest mistakes the brokerage world has made in the last 25 years. How can an advisor offer superior financial advice and guidance and also be top notch in manager selection, manager monitoring, asset allocation and portfolio construction? The skills required of a rep to be good at all the different pieces that go into being a good portfolio manager are simply not things that they have been educated on.
What do you think of the growing popularity of ETFs, and what fate does this spell out for non-ETF mutual funds?
I think of ETFs as another share-class structure and, as such, do not separate them in an "Us versus Them" kinda way. If not for the patent Vanguard has on the share class pricing mechanism I suspect many more groups would have already gone the ETF route. The popularity of ETFs has less to do with the structure itself and more to do with the growing appreciation for and use of passive investments. The bulk of ETF market share growth has been in large beta categories (large cap core) and the promise (hope really) of active managers beating their index on a fee and risk-adjusted remains, somehow, largely intact.
On the passive ETF side of things, the competitive landscape seems to be pretty well laid out in terms of SSgA, iShares/Blackrock and Vanguard likely to dominate the traditional product categories while firms like WisdomTree and ProShares and Rydex control most of the "specialty" offerings (invested, leveraged, etc.) Active ETFs are finding little traction on the equity side of things and I expect this to continue. I think there's not much anyone can do to energize that side of the business. There aren't that many out there anyway.
What do you feel are the real implications/outcomes of fee wars among ETF providers, and is the trend a sustainable one?
If an investment firm can legitimately add value to a product relative to the competition, then they will be able to get paid more for it. I see the ETF firms shifting their focus to bundling their underlying ETFs into pre-packaged solutions so as to be in the position to get paid for the value they add at the asset allocation level.
What's your take on ETFs trying to enter the 401(k) space, and how do their prospects there look? What's the best channel for entry there?
Plan sponsors increasingly guide their participants to the Target Date option (it is a default option) and there is relatively little activity among individual strategies. ETF providers should seek a sleeve of a Target Date series in order to access the 401(k) market. But, standalone ETFs I don't think there's much opportunity for...because you would need a plan participant to individually seek out that fund and allocate their assets to it, and participants just don't do that. So even if someone added an ETF to their roster of available offerings, I would not advise our clients on the ETF side of the business to expect much from that.