With the negative attention it has already brought to fees, the controversial Department of Labor fiduciary rule proposal is on the minds of every product provider concerned about its impact on active funds.
American Wealth Management brings a unique perspective to the fiduciary debate, as the Reno, Nev.-based firm operates as an RIA and an ETF provider. A key challenge the proposal will pose, say firm President Laif Meidell and investment manager Heidi Foster: are firms going to be active managers or are they going to be financial advisors?
"Certainly with active management, the question is about the perceived value and actual value and how that impacts us and what clients are paying for them," Meidell said in a conversation with Money Management Executive.
Meidell forsees a real struggle for active managers, and Foster notes imposed requirements will challenge advisors doing investment management.
Amid pending regulatory changes and market turmoil, what are some of the leading challenges you have noticed that are facing the asset management industry today?
Meidell: I don't think the industry has their arms around this yet and I think that the Department of Labor, although information seems to be moving its way out, is going to be looking at costs as part of that relationship and that's going to be one of the thrusts.
We were going through an audit of our own and we could see that the SEC had realigned themselves with their initiatives this year and they put their blinders on and said they are just really focused on 401(k)s, retirement plans rolling over to the IRA and trying to drill down into what was being offered.
I think that it's clear questions of cost and questions of value are going to become a bigger and bigger deal. You're going to be paying more. That's because, at least from the SEC standpoint, they want you to document that conversation and show how you've talked about the difference in costs between staying at your 401(k) and rolling their 401(k) to an IRA rollover. They want that conversation documented and they want you to have said, "I did make the client aware that it could have been cheaper to stay where they're at."
I frankly don't know the DoL's initiatives well enough to be able to say how to compare and to contrast. But, I know they are aligning and you can see that as an issue. Certainly with active management the question is about the perceived value and actual value and how that impacts us and what clients are paying for them.
I think what's happening is that we will be forced to make our relationships deeper than they have been. When a client comes in with questions about how they want to diversify, now we have provide either strategic allocation, tactical allocation or a combination of the two and we will do that for our clients. Not, 'I understand that this doesn't have to be just that,' but also a deeper relationship.
ETFs, thank goodness, are priced a little low. That maybe keeps them in the hunt a little bit longer, but some of these higher-priced mutual funds are going to make it pretty tough to argue to keep charging those costs.
What is the strategy for active managers looking to have their funds seen in the light that it is a premium product that will get provide better performance than, say, an indexed ETF?
Meidell: Clearly measuring by those standard risk profiles - by betas and things of that nature and measuring what kind of alpha they are getting, just as we have done for years and years - the question is how does the actively managed manager/advisor shares with all of their actively managed products, how do they position that and how do they show that they have value?
I think it's a real struggle. And especially certainly since we've had a bull market, it makes some of those active strategies less attractive. Over the last six months, maybe some of those have come around and the volatility may have helped some of the active managers make their case because certainly it's hard to make your case in a bull market.
Even when you look at active managers, you see guys that call themselves active, but they're basically active much like the S&P. They didn't make a lot of adjustments, and maybe they're smarter than others, but it's important to watch how they perform during these difficult times and see if they're actually adding some value, going to cash at some point, moving back in and being a little bit more nimble as they said they would.
Foster: With the DoL we are going to have to have more notes, more conversations documented - and documentation takes time - which means there is less possibility for people who have been financial advisors and investment managers to be able to do both.
They need to probably decide which one they are going to be - are they going to be active managers or are they going to be financial advisors?
Hiring out, I think, is going to continue in the outsourcing and investment management end for the people doing the work that the DoL is going to require. That's where I think it's going to be increasingly important.
I was also reading recently about compensation plans at the larger firms requiring larger and larger sized accounts. That's why strategies like our MATH (Meidell Tactical Advantage) and our MAUI (Market Adaptive Unconstrained Income) funds that are all encompassing in the fixed income.
The equity side can give you an active tactical management while you're focusing on how to grow your business and take care of all the documentation. That's where I think this comes into play, because it's just not possible to get everything done that you need to in a day.
I really don't think the brokerage firms or major wirehouses really want their employees to be picking stocks like they did 20 or 30 years ago. They don't want them searching for an individual bond. They want them finding somebody who is going to be doing that and hiring them to do that so they can go out and do the next deal.
How have you spoken with clients about competitive cost pricing?
Meidell: We always step into those discussions and so far it really hasn't been an issue for us. People that want to work with a human being, we're pretty competitive. We use ETFs, we use DFA funds, and as far as the individual investments that we select, there is a little cost that I think we can find that are out there.
On the fixed income side we have used actively managed bond funds. We think there is potentially added value there. We don't attempt to lose clients or potential clients because of cost. That's not something that we've noticed.
Foster: I think on the fund side as well, I think our funds are fairly priced for the active management that they've received.
Meidell: The question will be, how popular will WealthFront become and how popular will Betterment become. Will they gain traction? That model isn't for everybody. Obviously if a person wants to come in and talk to somebody and say, "I'm thinking about buying a new car or thinking about my son and his wife," we certainly have those discussions. I can see that people go when their husbands or wives are having a quarrel, and ask how they should help out our son and daughter.
In a post-fiduciary era, how important will it be to analyze the digital offerings from Vanguard and Schwab?
Meidell: I don't see that the digital offering from Vanguard is a heck of a lot different from what they've been offering already. It's what they've been giving with a different wrapper on it. They can pick up their costs and won't have to pick up the phone like they used to.
Considering Jeffrey Gundlach's efforts to put his name behind his firm's products, is there a way to convey confidence via strategy without having a brand name behind it?
Meidell: You know, I haven't seen that, but if you think about it, it kind of reminds me of Robert Arnott with Pimco behind him, but here you have DoubleLine with Gundlach. I think it's not an easy space to capture, but one where they have done a good job at positioning that.
What's more fascinating to me is when you look at a guy like Robert Arnott, that would suggest Research Affiliates fulfills the same kind of reputation, yet performance has been fairly uneventful.
They were $32 billion and $50 billion in all their asset allocations. I know they've probably dropped $10 or $20 billion, but still $30 billion is a big number to guys like you and me, and so there is something about the mentality of investors or advisors that are using those funds that gives them a sense of confidence.
Right, wrong or indifferent, regardless of the performance, sometimes it gives them the sense that they have built that image or persona and we're almost investing in that.
What types of strategies are managers considering in order to scale up, or scale down to focus on the customers needed to build a niche appeal?
Meidell: The niche appeal has developed so fast that people are launching funds so quickly those niches get filled up pretty fast. It's tough even in the alternative space where we're at. There are a ton of them out there and you sometimes look at these, even the big firms, some of the funds that they have only have a $2 million, for instance.
You would think at least each one of those buckets would have quite a bit of money, but some of those niche products are so niche that they can't even find a home. Even when they have an army of 200 people out there that are anxious and hungry to sell, so it's curious.
Foster: I've watched advisors that I've worked with through the years and they're looking for ways to bring good news to their clients, especially in a market like this.
As an advisor, you only have so long. We are reading magazines and looking for a good idea on how to help solve problems for our clients. We are going to read two pages of an article and you only have so many words to convey what you're saying to the rest of the world about how to help our clients and get them something they can grab onto and give them hope.
Meidell: There has to be some element to some part of the advisor world that is looking for something that is new and unique to say, I am bringing some added value here with a new idea. People say, "Great let's try that. At least you're doing something."
Foster: It's good for advisors too. When you talk to your clients, it's nice to say, "I found you something new and I'm on the cutting edge."