Wealth Management
(New York)
ETFs have been the dominant investing trend for the last half decade or so, eating away at mutual funds’ grip. However, what will be the next major investing trend? The answer may have just debuted. Orion Advisor Services has just announced a new product called ASTRO (Advisor Strategy & Tax Return Optimization tool). ASTRO “allows advisors to build tax-efficient SMA portfolios that can take into account clients’ environmental, societal and governmental concerns”, according to Michael Kitces, who says that the new technology is a threat to asset management and could prove highly disruptive, as it would allow better loss harvesting and more tax-sensitive liquidations in retirement. The system would allow advisors to “buy, own and manage a portfolio of all the underlying individual investments directly”.
FINSUM: This sounds like it could be a very potent offering, but we do not expect ETFs do go away any time soon.
(New York)
If you need some more information to understand why the big wirehouses are trying to pull out of the broker protocol, this is it. In 2017, independent broker-dealers snagged 118 wirehouse teams and took almost $28 bn in AUM, up 23% from 2016. The success comes as independents have closed the technology and product gaps with larger rivals, and IPO allotments have become scarce at wirehouses.
FINSUM: Wirehouses are generally growing fearful and are trying to throw up hurdles that keep brokers from breaking away. Hence the pullout from the broker protocol.
(New York)
So across the wealth management industry there has been a gnawing and anxious debate that may be keeping advisors up at night—does the fiduciary rule mean that advisors need to always offer the lowest cost funds to clients? Well, one lawyer’s opinion is a resounding “no”. Citing the rule itself, the DOL says “Adviser and Financial Institution do not have to recommend the transaction that is the lowest cost or that generates the lowest fees without regard to other relevant factors”. That other relevant factor could be a myriad of things, such as the other holdings in a portfolio or whether one fund has higher performance than another or a different fee structure and so on.
FINSUM: We have personally seen a lot of debate on this issue, and while many do realize that they do not have to offer the lowest cost investments, fear of regulatory trouble pushes them to do so.
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(San Francisco)
If you were an advisor at Wells Fargo who wanted to move to its independent arm you would face a big barrier—a so-called “tax” on compensation for two years. The tax was faced by brokers who wanted to move to the Wells Fargo Advisors Financial Network, or FiNet. The system is unique among brokers in that it lets brokers go without Wells Fargo totally losing them. However, the two-year tax on compensation was a big barrier. Now, the bank is considering getting rid of the tax so long as advisors sign a two- to three-year contract to stay at FiNet.
FINSUM: This seems a smart move to us as the tide of advisors going independent is only going to grow stronger.
(New York)
InvestmentNews has run a very ominous article. The piece cites recent evidence published by the Wall Street Journal showing that large discount broker-dealers often mislead clients by saying they do not have incentive fees when they do. Firms like Charles Schwab and TD Ameritrade often brand themselves in a very positive light, saying things like being “champions of investors" and putting clients first etc. However, such misleading behavior may lead to the current or future fiduciary rules being extended to cover broker-dealers entirely, not just regarding disclosing conflicts of interest.
FINSUM: We don’t think the current DOL rule is going to be extended in any way, but it does seem likely that the SEC might take this into account as it creates a new, more comprehensive rule.
(New York)
Speaking at a large ETF conference yesterday, the head of Vanguard has a big warning for all advisors. He said that the industry needs to change rapidly or face a huge loss of jobs. Citing evidence that almost 60% of advisor jobs may be lost to automation. He argues that portfolio construction and rebalancing are now super cheap commodities and that advisors should instead focus more on managing client behaviour, which will be a continued niche.
FINSUM: This was a pretty grave warning for advisors. We are not sure the outlook is so bleak.