It’s nice to be right sometimes, even if it’s not for all the reasons you thought you might be.
Back in March 2016, Citywire published a white paper called ‘The Rise of the Professional Fund Buyer.’ Broadly speaking, this found that the role of those involved in manager research was about to get a lot more important.
There were a number of reasons for this conclusion, including advisors’ growing focus on client relationships and the rise of outsourcing, but chief among them was the incoming Department of Labor (DOL) fiduciary rule.
Our research suggested that the then incoming fiduciary rule was making wirehouses, broker-dealers and private banks place a greater emphasis on home office research, buy lists and models in an effort to introduce more uniform portfolios and minimize the risk of advisors recommending bad funds.
Specifically, it was about avoiding the use of high-fee funds that have little to justify them in terms of returns, and thereby dodging possible lawsuits for firms under the new legislation.
At the time of the paper’s publication, the heads of research we interviewed estimated, on average, that around 53% of all investments recommended by their advisors were covered by the home office.
To be honest, we have not gone back and interviewed them again, but my bet would be that today that number is higher.
As we know, the fiduciary rule has not come into effect in quite the way we thought it would.
But the direction of travel was set and large advice institutions – particularly the wirehouses – for the most part, seem intent on pursuing their pre-DOL plans regardless.
These plans typically have two aspects: Cut the overall number of funds on the platforms and increase the number covered by the research teams.
While the first aspect is more about making platforms commercially viable than it is about any real fiduciary responsibility, it still increases the influence of gatekeepers. They now have a say over what funds they want to keep – even if these are smaller or less popular than the criteria for wider cuts. When the fund cull is complete, they will automatically cover a higher percentage of the funds that remain.
BRINGING IT HOME
The second aspect is self-explanatory. Although they are going about it in different ways, all four wirehouses are stepping up their research efforts, in some cases to cover the whole platform.
Arguably Merrill Lynch is already there, although it has had some help. Back in 2016 the firm announced plans to cut its platform of 3,500 funds by 40%, with the stipulation that those remaining must be covered by either Merrill’s CIO home office team or Morningstar’s Analyst team.
As a result, the Merrill due diligence team, led by Anna Snider, upped its coverage from 500 funds to 700 and hired Morningstar’s Analyst team, overseen by Laura Lutton, to cover another 1,100. Thus from a platform of 3,500 funds with 500 covered by gatekeepers, the firm now offers advisors 1,800 funds, all of which have been assessed by a professional buyer.
SLOW AND STEADY
While none of the other wires are quite there yet, it would appear they are moving in this direction.
At the end of January, Citywire broke the news that Morgan Stanley was further cutting down the number of funds on its platform and yes, you guessed it, increasing the coverage of its home office research team – global investment manager analysis (GIMA).
According to sources familiar with the situation, the firm is looking to remove around 25% of the 2,300 funds currently on its platform – itself a reduction from the 3,000 that it offered this time last year. The numbers are not exact for a variety of reasons, but if that 25% figure is accurate, around 570 funds could come off the platform by May. The affected funds – those with poor performance or assets below $25 million – will be soft-closed. What’s more, Morgan plans to conduct a third round of cuts next year, meaning this number could come down even further.
But what about that increased GIMA coverage? How many more funds will it now cover? Well, it’s hard to say, because err... Morgan Stanley wouldn’t say. However, the indication is that it could eventually cover everything. And of all the wires, it is arguably best-placed to do this. It has the largest in-house team, with 65 fund analysts in GIMA. Merrill is in second with 62, Wells is third at around 45 and UBS is a distant fourth at around 12.
Morgan Stanley already uses some services from consultants Segal Marco, and last fall the firm was reported to be looking at third-party consultants to help cover more funds. While GIMA head Alper Daglioglu was against the idea, and it seems as though no deal has been struck, it still indicates how the firm is thinking.
So what of the other two wires? It is harder to say, partly because neither has announced big platform cuts like Merrill and Morgan. In the case of UBS, this is because it has not started one – it was always more wait-and-see about the DOL rule than its rivals. With Wells, it is because it has kept quiet about the any moves it has made here, declining to put a number on it.
UBS’ small team of manager researchers is led by Joe Aniano. Even if it cuts down its platform, it would still be nearly impossible for the firm to cover everything.
As Citywire reported in January, the firm recently struck a deal with Morningstar to offer the latter’s Analyst Ratings and reports to its advisors. Aniano and his team cover around 225 funds, while Morningstar’s team covers more than 1,500.
While there is likely some overlap, this deal still greatly increases the number of funds covered by some form of research on the platform.
UBS was keen to point out that its deal with Morningstar was just a flick of a switch on the platform and that it would not dictate which funds were available to advisors or in any way impact the home office’s research process. In other words, this was no Merrill deal.
Still, between the extra Morningstar coverage and an arrangement with Mercer struck in 2015 to use its manager database, UBS’ small home office team has already shown itself amenable to using third parties to expand its capabilities. Could it go further in the future?
In truth UBS seems the least likely of the wires to move towards total analyst coverage, but its use of Morningstar and Mercer - in very different capacities - as well as the depth of its home office team, means there is no shortage of analyst coverage for funds on its platform.
Finally, there’s Wells Fargo. Of all the wirehouses, Wells is the one that can least afford a scandal right now, following the fallout of the fake account affair. Add to this the fact that the manager research team, headed by Greg Maddox, has been staffing up over the course of 2017 and now sits at around 45 members – up some 30% in a year.
The team already covers 885 mutual funds and would appear to have the budget and the backing of head office to increase this capacity.
It looks as though the professional buyer has well and truly risen.