In welcoming remarks to the more than 310 members attending the 2016 MMI Annual Convention April 20-21 in Washington, DC, new MMI Chairman John Sweeney underscored the aptness of the conference theme, Navigating Winds of Change. “While change is constant in the financial services industry, there are certain periods in one’s career where change is more significant than in others…I believe 2016 will be a year we look back on as one of very profound change in our industry for customers and for ourselves as professionals.”
Change was, indeed, the starting point for each of the meeting’s special guest speakers as well as each of the sessions. Of course, the “elephant in the room,” as one speaker put it, was the recently published DOL fiduciary rule – a much discussed topic in the formal sessions as well as in the hallways between sessions. MMI has moved quickly on its pledge to help members navigate the implications and challenges associated with the final rule, and the first step in that process was a member-only DOL roundtable held after the Convention’s formal adjournment. The Thursday afternoon program attended by more than 100 members included an overview of the rule and its impact on managed accounts, a discussion of implementation strategies, and separate breakout sessions for sponsors and asset managers followed by a quick-fire review and Q&A.
The next step in MMI’s education and support program for members is a DOL Fiduciary Rule Forum on Wednesday, May 25 at The Yale Club in New York City. Please note that May 25 is a new date for the Forum – rescheduled from the originally announced date because of a conflict with another industry event.
Following Mr. Sweeney’s welcoming remarks, MMI President and CEO Craig Pfeiffer gave a “state-of-the-state” review of progress on MMI’s five key strategic priorities: enhancing the membership experience, educational initiatives, deepening data resources and analytics, fostering next generation industry and MMI leadership, and advocacy that moves the advisory solutions industry forward.
Economic and Investment Outlook: Flat Market, Strong U.S. Consumer, No Recession
Robert Doll, Nuveen’s Chief Equity Strategist, opened with his keynote with an assessment of where the markets are now and where they are headed. “We are in a period in which we are frustrating both the bulls and the bears…an environment where it’s tough for beta to work. The first quarter of this year was the first quarter in U.S. equity market history when the market went down a double-digit percentage, up a double-digit percentage, and ended flat. We went a long way to go nowhere, and, sadly, I think it’s going to be the tale of the environment we are in.”
Since he cannot foresee a double-digit up year because of the deflationary problems overseas or a double-digit down year because of some of the good things happening primarily around the U.S. consumer, he concluded, “This is an alpha year – with the markets flat, all of a sudden two or three points of alpha are everything.”
Predicting a 7% return from stocks this year, assuming 5% earnings growth, flat price-to-earnings ratios, and 2% in dividends, his relative optimism stems from the fact that “…U.S. consumers are in better shape than most people give them credit for…Job growth is strong – we had more new jobs than ever before in the past five years, and there are more high-paying ones than low-paying, refuting another myth that is out there. Wage rates are starting to move up, a little more tailwind for the U.S. consumer.” Low interest rates have enabled debt refinancing, putting more dollars in consumer pockets. In addition, there is the energy dividend: “The decline in oil from $100 to $30 is more powerful for U.S. consumers than any tax cut they ever got.”
A recession is not in the cards, Mr. Doll reasons, because the typical preconditions for the end of a bull market – accelerating inflation, tight money, excessive wage growth, high interest rates, and investor euphoria – are just not there. “But while the bull market for stocks is not over, it is no longer young and vibrant. It is old and wrinkled and uses a cane to cross the street.”
The Changing Role and Face of Broker-Dealer Home Office Research
A panel featuring research heads from three different broker-dealer channels – wirehouse, independent, and TAMP – explained in depth their views on the do’s and don’ts for asset manager sales teams dealing with distribution platform gatekeepers. First, as one panelist explained, understanding the distributor’s needs is critical, and throwing five or six products on the table at once is a bad idea. “The reality is that the hard push on something that is not our top priority is plainly not going to work,” a panel member warned. “Put yourself in our shoes, and recognize what is going to look good and work from our perspective. If you have limited time, you want to put your best foot forward by avoiding spending time on a product you learned during the due diligence process is probably not going to be selected.”
Equally important are honesty and building trust. An example was given of a large asset manager with a product that had a great track record telling an analyst, “Just so you know, recently they have had tremendous turnover in the portfolio management.” That is something the distributor would have found out when researching the product, but by disclosing it early, the manager builds trust, and the next time the distributor gets a call from him saying this is a product I want you to look at, he will probably listen.
Transparency is paramount. Talk openly about what developments both good and bad mean and your strategy going forward around them. “And then there is timeliness,” a panelist commented. “Make sure we know about something before the advisors do – that’s the worst thing that can happen. Building and servicing the heck out of the relationships you have is the best way to grow a business.”
In building a relationship, play the long game – “It’s a marathon, not a sprint.” Ask what the distributor is focused on for the next six months. Don’t be the one who says for every single search that you’ve got the perfect strategy. Be willing to say that is not our area, we specialize in something else and move on. And later, when that something else is being sought by that same distributor, you will be considered. When you get a meeting, make the most of it by bringing the right person to the table, and be aware of the time limitations on the other side of the table. Make sure that every conversation, every email is adding value for the analysts. Lastly, make sure your products are in the relevant data bases.
Digital Delivery of Personalized Advice: The True Impact of “Robo” on the Wealth and Asset Management Industry
In an expert discussion of “robo” advice delivery, panel members from Invesco Jemstep, Betterment Institutional, and Vanguard Financial Advisor Services offered their perspective on the target market for robos, the breadth of and limitations on the range of services that robos can provide, the growth potential for robos, the role of the human advisor in the robo matrix, robos’ impact on the trend toward passive investment products, and the cost and fee pressures robos are bringing to bear on the advice industry.
Diverging Viewpoints: Compensation Models in the Advisory Solutions Industry
This panel moderated by Convention Co-Chair Brett Wright took a step back and surveyed what is happening beyond traditional compensation models based on gross sales commissions. It looked at the pros and cons of alternative models with commissions based on asset retention, metric-driven bonuses, gross vs. net-based approaches, and long-term incentives.
Helping Advisors Articulate Their Value Proposition
This panel discussion focused on the ways in which firms are helping advisors better communicate the value they bring to clients at a time when they are being pressured by the growing strength of the movement toward digital advice. It also took a look at how some advisors are embracing the unique power of “behavioral alpha” – adding to real returns through a structured process of behavioral coaching.
Gateway to Leadership Dinner: Honoring Industry Achievement
The eighth annual Industry Leadership Recognition dinner to raise funds to support MMI’s Gateway to Leadership workplace diversity program brought day one of the Convention to a fun-filled close. MMI’s Board of Governors honored Robert Noelke, a recently retired Partner at Lord, Abbett & Co., as the 2016 Advisory Solutions Pioneer, and ten firms were recognized with Industry Leadership Awards for their innovation and achievement in advisory solutions over the past year. In addition, DTCC received the MMI Gateway to Leadership Award in recognition of its long-term commitment to and support of Gateway to Leadership. Thanks to the generosity of the audience and donors and the auctioneering skills and humor of Bill Brennan and Mike Murphy, the dinner raised significant funds to help support the Gateway program.
Keynote Speaker: A Single Uniform Fiduciary Standard Becomes the Final Step in the Full Professionalization of Wealth Management
Kicking off day two, John Taft – CEO of RBC Wealth Management - U.S. – argued that our industry should embrace comprehensive wealth management. “Someone used the analogy that our clients walk into our offices wanting to know how to get from Minnesota to Florida. We sit down and don’t even talk to them about what kind of car they should use to get there. We talk to them about steering wheels, tires, and mufflers – stocks, bonds, and mutual funds. What they want to know is how do I get to Florida? That’s goals-based wealth management, and we have evolved to that.”
In that evolution, the industry has developed a comprehensive suite of services that includes risk management, lending, long-term care, and estate planning that go alongside the investment products. “That comprehensive suite of services and the advice and discovery that drives it is available today at a fraction of the cost of what it was 30 years ago. It is being delivered by advisors who are infinitely more qualified, better trained professionals than they were 30 years ago.” Firms have also, Mr. Taft pointed out, been investing heavily in training teams of expert resources and in technology – aggregation tools, integrated reporting, document management vaults, cash management capabilities.
“The difference is night and day, and yet that story, which is a good story, hasn’t been effectively told. The result of that is the fragmented, conflicting and extremely complex regulatory regime we are operating in today, and it is only going to get worse, not better in the near future.” Starting from the fact that there are currently four “flavors” of fiduciary rule coming from the chief regulatory bodies, Mr. Taft advocated at the close of his remarks a Presidential Commission or some other kind of high-level task force charged with creating a uniform umbrella fiduciary standard that applies to everyone in the industry. “A uniform fiduciary standard is the final stone in the path toward the full professionalization of the wealth management industry.”
Executive Spotlight: Advisory Solutions in the Decade Ahead
Senior financial services executives Christine Nigro, Vice Chairman, AXA Advisors, John Moninger, former MMI Chair and Director of Retail Sales, Eaton Vance, and Jim Tracy, Head of Consulting Group and Practice Management, Morgan Stanley, explored in an “open chat” panel moderated by Craig Pfeiffer major trends that are certain to affect the future path of advisory services.
In a discussion about the DOL fiduciary rule, Mr. Tracy commented that, “Whatever you may think about the rule, it has made us rethink the business. The fact of the matter is we now have the rule and have to move forward and adjust our businesses accordingly…As I see it, most firms have reacted very well to the fact that there needs to be some modifications to the business.” Mr. Moninger pointed out that historically most important industry developments have been driven by regulatory change, and with that change has come opportunity, an observation supported by Ms. Nigro. One of her principal concerns, however, is that small clients who will no longer be as easy to serve on a one-on-one basis will be hurt by the rule’s implementation.
Turning to digital advice, Mr. Moninger asked whether robos could effectively provide the level of personalization that investors are requiring today, especially Millennials. “Can technology help us make better decisions and provide a better experience for a client? Absolutely. What we should embrace is continuing to improve the client experience, providing better personalization and being able to substantiate the value of the fees we are charging. That’s the opportunity we have to differentiate ourselves from what else is available.” Mr. Tracy predicted that robos will end up driving growth in the wealth management business by pulling into the industry some of the 87 million Millennials who might not otherwise invest.
The panel also addressed three demographically related topics – the looming shortfall in advisors as Boomers retire, the need to attract and train the next generation of advisors, and need for greater diversity across the industry, which Mr. Tracy termed the biggest challenge confronting the industry.
What’s Beyond the Horizon for Asset and Wealth Management?
A panel moderated by Convention Co-Chair Ron Fiske started off with an industry overview indicating that, while the last four to five years have been remarkably good for the asset management industry – revenues are up, margins are up – the news is not uniformly good. Although there has been an increase in revenues, they are not growing as fast as assets are increasing, and the industry is starting to see fee compression. Once we encounter choppy market returns, a much bigger spread is foreseen in margins between profitable managers who are winning and taking share and those who are starting to lose share.
It was noted that margins have held steady primarily because of cost cutting and improving efficiency. The probability of 2% industry growth isn’t, however, a bad story when you look globally. The U.S. market is quite robust and relatively attractive compared to the rest of the world, and one panelist sees much more competition on the way. “It’s going to be a take-away game going forward.”
Active vs. passive? “At every conference we go to, we have this conversation. This conversation should be over. Neither one is going away, and they will be part of every advisor’s portfolio. An asset manager should be asking what part of his or her value proposition either style represents. The sales approach has to change. We have to understand the data, understand who these advisors are, and find the areas where active management delivers the most value.”
Looking ahead, the industry will be very different in five years, but the way the industry is changing is not the result of the DOL rule, which is just accelerating that change. The three key change elements are the move to fee-based compensation that the wirehouses are encouraging, the trend toward robo advisors, and the shift to low-cost, passive products.
Andy Friedman Predicts: Clinton, a Certain Candidate; Either Trump or Cruz in a Convention Showdown
In his extremely well received remarks, Andy Friedman, the political guru of The Washington Update, opened with his evaluation of the House and Senate races. The political redistricting in 2010 has made the Republicans winning the House a sure bet in 2016 and as well as in the following decade. With control of the House, Republicans can stop or start any piece of legislation they choose – not good news for Hilary Clinton, who will face the same legislative gridlock as President Obama if she is elected.
As for the Senate which the GOP took two years ago, it is likely that the Democrats in an ordinary election year would pick up enough seats to regain control. But the Presidential election could change that because Americans are more reluctant than ever to split tickets, and a candidate who really excites the electorate could pull in otherwise weak Senate candidates. Therefore, Mr. Friedman’s prediction is that whichever party wins the White House will take the Senate, as well.
The election outcome, he believes, will hinge on independent voters – people who typically are more worried about economic issues, jobs, government spending, and taxes. They are not worried about social issues like gay marriage or climate change, and they want to see compromise – they don’t want to see stalemating. The candidate whose profile comes closest to those values will get the independent vote. Similarly, a party that attracts minorities will have a significant advantage.
Looking at the candidates, Mr. Friedman said, “Donald Trump has shown me something new – you can insult your way to the Presidency. Who knew that? Why has he done so well? The reasons are threefold: Trump supporters are typically white, typically male, and typically not college educated. His supporters feel their lifestyle is under siege both economically and culturally. They feel disenfranchised.”
Who will the nominees be? “As I have been saying for two years, I think Hilary Clinton will get the nomination. There is no one who can stop her…My prediction is that you will see either Trump or Cruz as the Republican nominee. A white knight like Paul Ryan or Mitt Romney coming in is not going to happen. If Trump goes into the convention without 50% of the vote – and I don’t think he can get 50% – the convention will come down to a question of how far behind Ted Cruz is.”
Negatives for Mrs. Clinton in the general election: her embracing of the Obama administration and her greater than 50% negativity rating – more than 50% of those surveyed say they don’t like her. Normally that would knock a candidate out of the race, but Trump’s negativity rating is even higher – eight of 10 Hispanics have said they’d vote against him as well as 67% of women, including Republican women.
If you were able to join us, we hope you left the Convention feeling energized and invigorated. If you weren’t able to attend, please contact us with questions on any of the topics or resources discussed.
In either case, check the MMI calendar for upcoming events, including the DOL Fiduciary Rule Forum in New York City on May 25th.
The Annual Convention received significant coverage in the industry press. View a summary of Annual Convention-related articles.