Michael Lane is director of adviser services at TIAA-CREF. Lane joined the company just over a year ago to help market TIAA-CREF products to registered investment advisers. During his tenure, the department has grown from five to 18 staff dedicated to the adviser distribution channel.
After starting with little business among registered advisers, Lane anticipates that channel sales of mutual funds, 529s, retirement plans, annuities, life insurance, and long-term care insurance could reach a run rate of $1 billion a year, beginning by the end of this year.
Lane recently spoke with Mutual Fund Market News Associate Editor Tamiko Toland about how he intends to achieve this ambitious goal.
MFMN: How have you begun promoting mutual funds and 529 plans to advisers?
Lane: We are focusing our attention on putting a story together that helps people understand that we are a dominant player in the fixed-income market, managing more than $90 billion of bond assets and nearly $60 billion of real estate-related assets.
Most people are not aware that our extremely well-respected fixed-income managers are available via a wide range of tiaa-cref products, from mutual funds to 529s to annuities to life insurance. By the end of the year, we hope to put together a very clear explanation about the fixed-income side, letting advisers know that there is expertise here, and it's available across a diverse group of products.
MFMN: What about the equity side? How are you getting your story out, particularly since you are best known as an index manager?
Lane: We're doing the same thing on the equity side. We're further clarifying for the adviser community the process we use to manage our equity portfolios because it is still a little bit complex and it's not the easiest to define at times. And that's because we are playing a little bit on both sides of the fence: we index, but we also actively manage.
A lot of people criticize us because they say, "Out of one side of the mouth, you say that active management doesn't work, and that's why you index most of your portfolio, but then you actively manage up to 40% of the portfolio."
We're working to clarify that point and help people understand that, at TIAA-CREF, we look at cash flow as a leading driver for why active management tends not to work over long periods of time.
Money coming in and out of a fund really is a detriment to the equity management because they have to either place bets that they don't want to place, since they've got a lot of cash coming in.
Or, managers are forced to buy more of an idea than they really want to. On the other side, they may have to sell that idea sooner than they wanted to meet distribution requests.
What we're looking at is helping the adviser understand that, yes, we do believe that active management doesn't work in many situations due to, frankly, two hazards of the business: cash flow and high expenses.
Therefore, we're going to take cash flow and the expense factor out of the equation by indexing all cash flow and only making bets when an analyst has done their analysis and firmly believes there is a long-term payoff.
MFMN: You talk about intellectual capital as an asset, but TIAA-CREF has been largely viewed as institutional rather than people-oriented. Are you looking to change that image and promote the individuals behind the investments?
Lane: I think we need to balance that. We have been an institutionally managed company and very team oriented, but if you look at what makes tiaa-cref special, it's the people who work at tiaa-cref. It's the fact that the average tenure of people in our fixed-income team is approximately 17 years.
When you have that kind of tenure and experience, you need to highlight that - not hide it.
I think in the short term we'll continue to follow through with our team philosophy, but personally I would like to see us highlight some of the members of those teams and where those people have expertise and why advisers and investors would want to invest with these people.
It's still a team atmosphere and the team concept, but there are people who are going to bring knowledge and experience to the table that I think advisers and investors would be interested in learning about.
MFMN: You say this is something you'd like to do personally. Realistically, are you going to be able to personally get these stories out?
Lane: Time will tell.
MFMN: Right now, your mutual fund lineup is fairly limited, with only seven equity funds, four fixed-income funds, and an asset-allocation fund that allocates among some of these 11 TIAA-CREF funds.
Lane: At some point, the equity markets are going to stabilize and become a more predictable place to put money, and when that occurs, we'll be prepared with additional equity funds that maximize our strengths and round out the ability for someone to build a more balanced portfolio. This is especially true in our annuities, where right now we see a lot of fixed-income moving into our annuity, but in time, we'll see a lot more money moving into the equity accounts rather than just the fixed accounts.
MFMN: What equity portfolios are you building? Surely, your peers and competitors would be interested to know what you see ahead of the curve.
Lane: Our goal this year is to round out our portfolios by adding a small-cap fund, a large value fund and an inflation-indexed bond account. We're also looking at a real estate investment trust (REIT) as an option. By adding those portfolios, combined with our existing lineup, you could build an extremely low-cost, balanced portfolio for anywhere from one-quarter to one-seventh of what a typical retail commission variable annuity would cost.
The new portfolios will be available as mutual funds and within annuities.
MFMN: Will TIAA-CREF embrace separate accounts?
Lane: Given the history of TIAA-CREF, it would be difficult for us to go to the separate-account side because we've had a very large pool of assets managed by teams of people. So, no, we're not a small money management shop accustomed to running small portfolios.
Also, our fees are already so low that a separate account would likely only add to the cost and put a drag on performance.
MFMN: Your last job at AEGON was developing a market for annuities within the registered investment adviser (RIA) channel, which is a significant part of your current position at TIAA-CREF. Many advisers dislike annuities and are only interested in buying a less expensive product for customers who already have them. How are you convincing such advisers to consider annuities for other clients, and how does that fit in with the mutual fund product line?
Lane: Most fee-only and fee-based advisers don't like annuities. They often come out and say to us, "I'm going to roll everybody who's got one of these over to you, but I'm not going to make the mistake any more for that client and put any more money in that annuity." That's been the common theme in the eight years I've been working with advisers, but we do see a shift in some of the larger firms that are looking at the annuities and saying, "for a portion of a portfolio, annuitizing some of my clients' assets does make sense."
Then you start to go back one more step and say, if I'm going to annuitize a portion of somebody's assets, what is the best vehicle to annuitize?
Many of them find that what is best is to put a portion of the assets into the accumulation side of the annuity and then annuitize it later. We're seeing acceptance to the accumulation potential through the back door: people looking at it and seeing the benefits from a long-term perspective, that by annuitizing some of the money, they can guarantee themselves a steady income. And, alas, they discover that the best place to accumulate before they annuitize is the annuity!
Our strategy is to help people who have acquired annuities that are costing 250 to 300 basis points with all the bells and whistles. We will begin by educating both the investors and the sales community about which ones make sense and which ones don't. Next, we'll help them decide if it's appropriate for that person to exchange one annuity for another to lower their expenses.
In some situations, when they strip out all of the bells and whistles that the industry loves - and that really aren't necessary - that difference is over 200 basis points, so I'd say that's a long-term benefit to both consumers and advisers.
MFMN: How much of the low-cost strategy is a function of the RIA-channel's needs versus the TIA-CREF philosophy?
Lane: The thing that's wonderful about the ria channel is most of the people in that channel have a similar philosophy as tiaa-cref, which is the consumer comes first.
Most advisers' No. 1 priority is to do what's right for their client. It's not to sell a product. That's what tiaa-cref cares about foremost, too, so there's a perfect marriage of philosophies between rias and tiaa-cref.
I think that can be leveraged into other areas in the future and I think we should expand our marketplaces beyond rias to find advisers who, while they may have a different business model, share our customer-oriented philosophy.