Lorna Sabia, Managing Director, Head of Managed Solutions Group, Merrill Lynch
James Walker, Head of Consulting Group, Morgan Stanley Smith Barney
Matthew Witkos, President, Eaton Vance Distributors. Chairman of MMI.
Is your firm coming out with any new product offerings?
According to Witkos, Eaton Vance has developed a new product that they are calling Exchange Traded Managed Funds. It is like an ETF since it trades like a stock, except without the transparency of an ETF so that the money manager’s intellectual property is protected.
What is the sponsor perspective on mutual fund velocity?
No one wants advisors over-trading mutual funds, Walker commented. Firms look at trade velocity and try to keep it within a certain range, he said. The industry should be more aware of the difference between selling mutual funds individually versus fitting them into a larger portfolio. Walker thinks that market velocity won’t be going away any time soon.
Sabia feels that velocity is a complex topic and more data is needed to determine the impact that it might have on a portfolio. She also stated that she believes that sponsors, advisors and managers all “own” the issue of velocity and everyone should work together to deal with it.
While RPM started out using primarily individual securities, now pooled investments are 40-50% and growing. What new advisory products are you planning on offering in RPM programs?
There are already lot of discretionary programs out there that were designed to meet different needs, Walker observed. During the process, advisors should ask whether the client wants a transactional or advisory account. If advisory, then is it discretionary or non-discretionary? If discretionary, then who will manage it? While everyone strives for simplicity in product offerings, complexity often creeps in. This year in their UMA, they’d like to be vehicle and venue agnostic and make all products available, he said.
Is there additional risk exposure in RPM programs since advisors have full discretion?
There is substantially less risk in RPM when compared to standard brokerage accounts, Walker proposed. At Morgan Stanley, 27% of client assets are in RPM programs and they paid out 43% of the gross production credits, yet RPM accounts generated just 8% of the total complaints and litigation.
Morgan’s RPM program framework enforces diversification, so advisors can’t over-concentrate their portfolios in hot asset classes, Witkos noted, which greatly reduces risk. One of the biggest risks that does exist would be putting clients into RPM when it isn’t appropriate for them.
Witkos divides advisors into three groups; 1) power users; 2) aspirants – they need help to become power users; and 3) dabblers. This is the risky group, Witkos said, where every one of their account looks different, they have low asset levels and they’re constantly showing up on violation reports.
The perception of risk is often different than the reality, Sabia observed. There is a perception that RPM programs have a higher level of risk. But Merrill’s litigation experience with RPM is similar to what Witkos described at Morgan Stanley, she said. They force regular client reviews to ensure constant communication and monitor if anything has changed. This includes supervision against investment objective, against concentration and risk tolerance, she explained.
What trends are you seeing in RPM?
More Eaton Vance advisors are becoming interested in municipal bonds, according to Witkos. So much so that they’re considering outsourcing the search for inventory and creation of laddered muni portfolios. They’re also seeing increased activity in closed end funds, he said. Both from advisors buying them and from clients transferring them over. In order to help consolidate the many funds, Morgan created a separately managed account of closed end funds. This provides clients with diversification across thirty-five to forty different closed end funds.
Do you see any movement towards paying wholesalers based on net assets?
Witkos believes that it would be very difficult to pay wholesalers based on net sales since reporting is different by channel and by sponsor. There will always be questions about whether the net sales number are right. One of the biggest challenges is educating the sales force and distribution are about how the company makes money. Many asset management firms are finding ways to include net component into territory level sales reports.
Does your firm measure client outcomes based either on performance by program or by client satisfaction ratings?
Walker said that they look at client satisfaction reports on their RPM program and that they tend to have the highest ROA and more positive responses. Discretionary programs usually have the highest satisfaction levels. This is mainly due to the RPM program discipline and frequency and consistency of client contact. An ancillary result of the surveys is more thoughtful conversations with clients about potential outcomes, he said.
Morgan also does very broad measurements against peer groups and benchmarks, although they’re not as prescriptive as in the asset management business, Walker continued. They also look at account activity and performance in order to identify outliers and try to reign them in quickly, he said.
Dispersion of performance is important, but must be kept in perspective, Sabia advised. Advisors in Merrill’s RPM program have additional flexibility at the higher levels and they are concerned about the other advisors who are in the program with them. There is also peer-to-peer training and advice provided within the organization. There is a constant shifting in advisor segmentation going on that must be managed, she said.
Have you seen any change in mutual fund holding periods in RPM versus transactional?
The discretionary aspect of RPM results in more activity than commission-based brokerage accounts, Walker noted. This is mostly due to rebalancing and targeted adjustments in portfolios, not from wholesale liquidation of funds.
The industry averages pre-crisis was 3-4 years, but is now down to 1-2 years, Witkos said. Advisors are using less B and C-class shares, which acted as gates to dampen volatility. Some firms are providing their advisors full discretion along with better tools to manage the increased volatility, he said.
Are you looking at diversification at the account level or the household level?
Today, Merrill is only monitoring diversification at the account level, Sabia confirmed. They maintain a strong partnership with regulators and would like supervision to be at the top of the client relationship. There is a handful of portfolio groupings that include managed accounts and brokerage accounts, she said.
What are some of the trade offs between business line decisions for RPM vs home office-driven programs?
The reality of this major shift is that when the market crashed, it became a performance story, Sabia concluded. We need to keep our broad perspective and communicate how RPM relates to their third party strategy. There needs to be clarity around performance expectations and how strategies get into the program. They continue to look for the most efficient way to serve clients while staying platform agnostic, she said.
Too much choice sometimes works against you, Walker cautioned. As firms add more products and programs to their platforms, it runs the risk of becomes confusing for advisors.
This was part 2 of 2 of the session summary. You can read Part 1 here.
The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at email@example.com