Advisors taking more control of portfolios, demands for transparency will shape industry, two insiders say.
This article originally appeared in the December/January 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.
The growth of exchange-traded funds is not just changing the way people invest. It’s also affecting the way advisors operate their businesses and work with clients. In today’s advisory world, the trend is toward efficiency and transparency, with advisors and clients demanding more control over investments and fees. To discuss this changing environment and the role that ETFs are playing in it, we hosted a panel Oct. 4 at the Morningstar ETF Invest Conference. Joining us was Paul Hatch, vice chairman of Morgan Stanley Smith Barney, the largest wirehouse with 17,000 advisors and $1.8 trillion in assets, and Mark Wiedman, the global head of iShares, the world’s biggest provider of ETFs. Below is an edited transcript of our discussion.
Scott Burns: Today, I’d like to discuss the role of the financial advisor and how it’s changed. Paul, in your 29 years of experience, you started as an advisor and worked your way up the company. Is the role of the advisor more important, less important, or the same today as it was when you started?
Paul Hatch: I don’t know if I would use the words “more important” or “less.” The role of the advisor has always been important. I think it would be fair to say that the role of an advisor is far more challenging today than it was 30 years ago. The expansion of different types of solutions that are available to advisors, regulation, the difficulty of trying to get returns for clients in an environment in which equity returns are single digits and volatility remains with us all make it a lot harder for advisors than it was before.
The role has changed from one in which advisors focus primarily on questions such as “should we be in equities?” or “should we be in fixed income?” to really managing that whole process. Over the past five years, the rise of the rep-as-PM [representative as portfolio manager] movement, which has really been around for more than two decades, has been remarkable. It was keyed off by 2007– 2008, in which advisors thought that their third-party portfolio managers would protect them from catastrophic losses. But the third-party managers were never hired to do that. So, advisors started to change their role.
It’s going to change the industry. It is a permanent trend and changes the way advisors view themselves with their clients. They’re taking on more accountability and responsibility. It will make the wirehouse community look more like the RIA community, which I think is a good thing.
Burns: Mark, you’ve got the global view. Do we see this happening elsewhere?
Mark Wiedman: Throughout the West, the forces behind what Paul’s talking about are inexorable, and they are palpable. In the United States, over the past 10 to 15 years, we’ve seen the gradual rise of fee-based advice. We’re seeing it broadly in the asset-management industry, not just in wealth advisory. We’re seeing a value migration. It’s like an hourglass. The central piece, which is long-only active management, is slowly declining. There are many winners in that category, and there could be growth, but in general, value has migrated out of that category, and it’s going in two directions. It’s going upward toward portfolio construction and asset allocation. And then we’re also seeing value migrating to beta exposures. That’s because the real value in working with clients is constructing portfolios and then offering them broad exposures as efficiently as possible.