It's the Destination, Not the Vehicle

This article first appeared in the August/September 2011 issue of Morningstar Advisor magazine. Get your free subscription here.

To say that the business of giving financial advice to people has changed dramatically over the past several years is a dramatic understatement. Not only are the ranks of fee-only advisors swelling, but so is the array of products and providers seeking to serve them.

To explore these changes, we invited two executives who are addressing the advisor market from different vantage points. Marty Flanagan has dealt with advisors of all stripes his entire career, first at Franklin Templeton and now as CEO of Invesco. Vanguard, primarily seen as a shop for do-it-yourself investors, has taken increasing interest in fee-only advisors under Bill McNabb and his predecessor.

Both firms have broad mutual fund lineups, but they also are fighting for market share in the exchange-traded fund space--Vanguard with a stable of broad-based index ETFs and Invesco PowerShares with a lineup that has pushed the boundaries of passive investing. What follows is an edited transcript of Flanagan and McNabb's discussion on June 25 on the best way to serve advisors and their clients.

Dan Culloton: Given the changes in the advisor market, what are the challenges of reaching advisors in this environment?

Marty Flanagan: I think a lot of the changes in the advice channel have been positive ones. The movement away from commission-based compensation to asset-based compensation is very, very good for investors. There's been obviously quite an emergence of independent financial advisors. Our focus is a pretty simple one: All we do is manage money. And so, first and foremost, our focus is making sure that we're meeting the needs of the advice channel through the depth and breadth of the investment capabilities we have.

But also I think what's happened over the years--and I think importantly--is the movement of [us asking], How do you help advisors be successful? At one level, it's understanding our investment-management capabilities and how should you expect them to perform in different markets. But it's also trying to be very, very thoughtful with advisors and understanding what their needs are. Everybody has relative strengths, and understanding the relative strengths of the different advisors is very important. I think investors are vastly better off than they were 10, 15, 20 years ago.

Bill McNabb: We have served independent advisors for more than 25 years, but it was a relatively small segment of the marketplace. As we began to see the business model for advisors change from transaction-based to fee-based, the big "Aha!" for us was: How would advisors react if we treated them the way we treat many of our institutional clients?