Though the Labor Department’s fiduciary rule did not turn out to be the burdensome law that many in the asset management industry feared, providers still have to think through how products will change and the support they will need to provide advisers, says Neil Menard, group president CNL Capital Markets and president of CNL Securities.

In a conversation with Money Management Executive, Menard said that there is still much industry uncertainty about managing change.

“We are moving from a product that’s suitable to a product that’s in the best interest of the client,” he said. “And nobody knows what that means yet and I don't think we know what it means yet.”

Menard also identified a key strategy in the firm’s adviser outreach: less around the products, he says, and more about how they can better run their business.

What do you say to alternatives advocates who think smart beta has seen its day in the sun?

For one, there has been a major movement from traditional investment to alternatives in the institutional world. We have yet to see that fully take hold in the retail marketplace. So, I think we are going to see more and more of a push towards alternatives in the retail space, and we are starting to see that now.

I have been in the business for 27 years and I’ve been in alternatives for the last 10. So, the truth in what’s going on in the retail space is now you are seeing the big institutional firms moving in the retail space in the form of Blackstone and Cantor, and KKR and CNL. So, those guys are driving new products and new sponsors to the alternative space on the retail side rather than just on the institutional side.

In an offshoot of the most recent regulation, and this maybe will tie into the DoL, I think is that we are seeing the institutionalization of the direct investment industry, meaning more transparency, lower fees, more focus on good performance.

And putting products into automated investment platforms?

Yes, putting products into automated investment platforms like robo advisers, which have become more popular, and REITs. Direct investments are going to have to somehow work themselves into that world. I think for the right clientele, there is an illiquidity premium, and I think alternatives still have a place.

CNL has been doing this for 43 years. We’ve been doing it in the independent broker dealer world for the last 30 and alternatives, in our mind, are non-correlated and have the potential to reduce volatility in a diversified portfolio of stocks and bonds. Remember we’re not 30% of somebody’s portfolio, we’re maybe 10%, and then somebody else’s maybe five or 10%. The big institutions have 50% in alternatives and the average retail investor has less than 5%. If we can get that to 30%, then they’re moving in the right direction.

What were some of the questions your firm fielded at its latest webinar?

I think what was on peoples minds are that we are moving from a product that’s suitable to a product that’s in the best interest of the client. And nobody knows what that means yet and I don think we know what it means yet. I think the other part is you have to have compensation that is going to be reasonable, but who is going to define that? It’s probably going to be some plaintiff attorney, or maybe not. Maybe it’s the broker dealers who start to define both of those things, and as they do, putting limits on the amount of alternatives their representatives can use with specific clients.

Would you say that’s a gap largely because the retail investor still doesn’t have an idea about this?

Well it’s education; they need to be educated, the advisers need to be education so that the investors can be educated, and we spend a lot of time on education from the top down.

Our model is simple; we call on the home office of the independent broker dealers, and we don’t call on the wires yet. We are building a big presence in the RIA channel because we all know fee-based is pretty much where the market is going, so we’re building that out as well. We have a team set up appropriately to do both, and that’s a process that’s ongoing.

I think the broker dealers have now spent a lot of time.  When you ask what it’s like from our side of the business, I think it was a win for us. They basically got rid of the list, which we were worried about. We were worried about grandfathered commissions; gone. For us, it was a pretty good win.

But the work is going to fall on the broker dealers, and they’re looking for help. The broker dealers have now put policies and procedures in place to define both of those things and prevent in suit.

What has your firm seen as an effective strategy in that education process versus lessons learned on what maybe didn’t stick?

It’s less around what our products do — because product education is something nobody is that interested in — and it’s more about how they can better run their business, how they can build better portfolios, how they can manage their volatility better, and we have created modules for all of these things that our sales guys can take out to the financial adviser because listen, there’s no shortage of REITs in the marketplace right now.

If I were to come to you and say, “Hey, I’m with CNL. I want to come visit because I have a REIT to offer you,” they’ll just say, “Yeah I can read about it on the website.” But, if I say, “Hey, would you let me spend 30 minutes to show and help your clients manage through the volatility in the markets, would you be willing to take that opportunity?” So, then you have to deliver on it. We have a module that helps them do that, and frankly part of that is to build portfolios that put together non-correlated investments. Otherwise the correlation is one-to-one in the liquid retail marketplace. If you’re buying public stocks in a mutual fund, or public bonds, there is not a lot of diversification there. Now it doesn’t even matter if you buy international bonds or international stocks, but the correlations are pretty high.

But, we have built modules and we have an expert who we use for public speaking; John Rhodes (vice president of Practice Management for CNL Capital Markets).  What’s unique about when Dr. Rhodes speaks is everyone leaves with a deliverable — something they can take back to their office and work on. If they do it — and we can’t force them to do it — it is usually a pretty positive outcome.

Are advisers giving you a preference of how they want to ingest material?

I will tell you, just from my experience, it depends on the adviser. The RIAs, I will tell you, do most of their research online before they do anything. Then they’ll call you. They want to pull the information, and they don’t want to be pushed.

In the independent broker dealer channel we push the information and we use all of the things that can track click-throughs, and do all of the things you do in electronic marketing.  But, it depends on the audience and whether they want it pushed at them or draw it out themselves, and we try to meet both of those.

This is something that is very challenging because it’s different for everyone, and it’s something that I have asked of advisers, and ask, “How do you want us to contact you?” They’ll say, “Well I don’t want anyone else to call me, so email me.” Then we’ll send an email and it gets spammed. So then we have to figure out how to get through the spam filters.

I will tell you from a marketing perspective, we spend a lot of time on the subject line — what is going to grab somebody else’s attention and get them into the messaging that we really want to get them into? One word can change your open rate from 5% to 19%.

What are some of the things you have been talking about when it comes to educating clients on alternatives?

For us, the DoL; it is what it is and we will see. I think we’re all in that mode and we’ll do more research. But 1502 is here. It’s done. It’s implemented and we’re all doing it.

The response to 1502, in the non-trader world, is to build these T shares. So, rather than paying the big upfront commission we pay the smaller upfront commission in a trail. The challenge with that is there were things going on in the industry where people were fronting commissions so that it makes a statement look better on the front end and they’re getting it back on the back end. Let’s make no mistake; they are getting their money. Let’s not be fooled by that. But what’s interesting is that now it creates a conversation around the wrapper rather than the underlying investment, and that’s not good for the industry.

In fact, we have trained our people and our sales people that they have to know that stuff, not only because they are going to get sucked into that conversation, but also you have got to sell the product for the merits of the product and not for the wrapper of the product.

CNL is a very conservative company and we have been for 43 years, which is why we are still in business. When you look at some of our competitors of late, they have not made it that long. And we’re not playing games with the commission because we think it flies in the spirit of the rule.

If you think about it you have the 1502 and the DoL. The whole idea on DoL is, the DoL basically said we can’t trust advisers to do the right thing by their clients, in its simplest form — or advisers have to act in the best interest of their client, to use their words — not to sensationalize it. The reality is that if we do these as an industry — these schemes of fronting commission and making statements look better — and representatives sell more of that product because of that, aren’t we making the DoL’s case for them? We’re not going to do any of that stuff, we are going to sell our products on the merits of the product, the statement is going to reflect the appropriate commission and we’re going to compete that way.

Has this made CNL reevaluate its partnerships in anyway?

I think it has made us reevaluate our products. I think we have very strong partnerships. We invest a lot of energy in relationships with our partners, which is the first line of our mission statement, by the way — we have anchored in 40 years of investing in relationships.

But I think it is making us look at products that are going to be more perpetual and not products that have a start and an end and then a listing, but products in different wrappers like closed-end funds, and interval funds, that provide more liquidity and more transparency. So we are moving in that direction as well.

We are always going to be in the real estate business, but we need to innovate and we need to continue to create products that are relevant in today’s market.

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