If you are a strong advisor looking for a change, Deutsche Bank may be interested in speaking with you. At least that is what Deutsche Bank is saying. The US wealth management arm of the German bank says it wants to growth the ranks of its wealth advisors by 25% this year. According to the head of Americas wealth management there, the orders from the top are to “grow, grow, grow”, adding that “We’re getting dollar investment going into the unit for headcount . . . there’s great access to the management board.”
FINSUM: This is a big initiative considering that the only European brand to have any foothold in US wealth management is UBS. The other big names are all American.
Everyone knows mutual funds have been on the decline and ETFs on the rise as active management gives way to the rise of passives. However, new data throws a wrench into that narrative—hedge funds are surging in popularity. Hedge funds now account for 28% of all alternative asset demands among investors, just one point shy of private equity, and way up from 12% a year ago. The catch is that hedge funds don’t really look like themselves anymore, with new fund structures, such as separately managed accounts and lower fees, that make them more useful for investors. Co-investing is another big growth area, where major investors invest alongside hedge funds in specific deals.
FINSUM: So hedge funds have surged in popularity, but they are not hedge funds, in the same sense, as before. Further, fees are down, with the average being a management fee of 1.45% and a performance fee of 17%.
Every investor knows ETF have surged in popularity. However, one the big questions of major importance in the industry is “who owns them?”. The answer is, mostly, investment advisors. There has been a major shift in the ETF industry since the Crisis, as ETF consumption by Investment Advisors has surged as AUM in that area has grown. What’s more, that holding is rocketing year on year, with total AUM ownership in the segment growing by around $400 bn between 2016 and 2017. Brokers, by contrast have seen their total share of ETF ownership plummet, from 16% in 2007 to just 2.2% now.
FINSUM: Retail still owns the majority, but investment advisors have been the major growth driver for the segment and their influence is widening considerably.
It was long awaited, but still hit the market like a hammer. It was one of those things that you can prepare for over a long period, yet are inevitably shocked when it arrives. In this case, it was the long-awaited release of a zero fee index fund. Fidelity was the first to do it, and while it was anticipated, the move is likely to have far-reaching effects on the industry. For instance, one of the big changes is that large index funds will likely no longer pay licensing fees to the indexes themselves. At the same time though, indexes will proliferate for more narrow and niche areas designed to track all manner of themes. Fees will likely continue to fall, even on the more complex products.
FINSUM: Asset management is seeing a very serious race to the bottom, which is reflected in share prices lately. Two thoughts come to mind. Firstly, those with huge scale will be the big winners as the industry grows more consolidated. Secondly, how long before retirement funds seeing a reckoning and a big move out of expensive products (they are paying an average of 61 bp in fees)?
Fidelity made history this week by introducing the first zero fee funds, which will track very broad self-indexed markets. Fidelity’s move is somewhat of a ploy, and definitely a demonstration of scale, as the company has many ways to profit from a customer once it has them in the door. But don’t be fooled, as fees aren’t everything. In fact, there are significant differences in performance even between index trackers of the same benchmark, like the S&P 500, and the differences between them can add up to a whole lot more than the difference in fees. For instance, Schwab and Vanguard already have broad index trackers at 3 and 6 basis points of fees, so hardly a big difference to zero, especially if their performance is better.
FINSUM: “Zero” definitely changes things, but once you are in the sub-15 bp fee category, performance is going to make a bigger difference than fees.
The moment that many asset managers have been dreading has finally arrived. Fidelity announced yesterday that it was slashing prices on many of its funds, and crucially, offering two new index mutual funds with no fees and no minimums. Thus, the Rubicon has finally been crossed—the first broad index funds with zero fees, and no minimums. Many top asset management stocks fell considerably on the news. Remember that asset managers can still make money on funds with zero fees—through stock lending—but they need considerable scale to make that money meaningful.
FINSUM: It was only a matter of time before this happened. We expect Vanguard will follow suit quite soon, as will BlackRock, as lower fees have been by far the biggest selling point in the market for years.