Money Management Executive
WASHINGTON — Investment companies interested in capturing market share should not worry so much about new products like separately managed accounts, exchange-traded funds, or even funds mimicking alternative investments, an investment adviser says, because tried-and-true fund structures work just fine.
"Mutual funds rule," Charles "Chip" Roame, the managing principal at Tiburon Strategic Advisors in Tiburon, Calif., said at the Investment Company Institute's 49th annual membership meeting this month. And they will continue to dominate despite the proliferation of competing products, he said, because independent registered advisers like them.
What is more, though captive brokers and retail banks once directed sales for as much as 58% of investable assets, independent representatives and fee-based financial advisers are gaining ground, Mr. Roame said.
From 1995 to 2006, client assets held by fee-based advisers grew 18% and those by independent representatives, 11%. Wire houses and direct-sale discount brokerages, on the other hand, saw asset growth of 11% and 9%, respectively. Bank-client assets grew 3%.
Much of this movement was driven by baby boomers who, when rolling their assets out of employee retirement plans or turning other assets into cash, often look for someone to advise them.
"Your business is all about the baby boomers for the next 20 years," Mr. Roame said.
It is big money, too. Consumer households' investable assets are a $19.8 trillion market, and retirement plan rollovers could add $7.5 trillion. Selling the family house or that mom-and-pop business is expected to pump another $9.6 trillion or so into the marketplace during the next few years, according to Tiburon research.
Mr. Roame said he had another investment myth to explode: High-net-worth investors — the segment all advisers long to tap — like plain-vanilla mutual funds, too. "Rich people buy mutual funds," he said.
And boomers are seeking security over investment process.
"You develop all the wrong products if you don't understand American wealth," he said. Many companies fall into the trap because they focus on building products that chase trends, he said, rather than sticking to core competencies.
Exchange-traded funds are an example of product innovation gone wild. "If you look at what's in registration right now," Mr. Roame said, "it's ludicrous the number of ETFs." For companies hoping to play catch-up, the flows these products attract may not make them worthwhile, he said, adding, "Sixty percent of flows are still going to go to Barclays," a pioneer and the market leader in ETFs.
At the other end of the tug-of-war between investing for alpha and trying to match index returns, the emergence of registered products that mimic alternative investments, such as 130/30 funds, may be interesting to advisers but are not necessarily useful.
"We look at them, but we don't use them," said Michael Freiman, a senior investment management consultant at Citigroup Inc.'s Smith Barney; his staff of nine manages $700 million for high-net-worth clients and a peppering of institutions and endowments. "They are not yet tested," he said of the new products.
The same goes for separately managed accounts. SMAs don't always make good economic sense to advisers, said Thomas Skrobe, a managing director for product development and management at BlackRock Inc., an investment company majority-owned by Merrill Lynch & Co. Inc. "There is more work, more people, and the margins are tight," he said.
Mr. Freiman and Mr. Skrobe also emphasized the danger of products that appear expensive. "We manage fees methodologically," Mr. Skrobe said. "We want to be at or below the median," he said, using Lipper and Morningstar indexes as benchmarks.
"We don't want anyone to look at us and question why we are doing things," said Mr. Freiman. His clients get a report showing expenses in dollars and cents, as well as percentages. Products that make fees just as transparent are important to him.
What advisers and investors alike want is advice, Mr. Skrobe said. This makes products such as life-cycle funds, turnkey asset management programs, and unified managed accounts attractive, he said.
The proof is in the sales growth of such packaged products, Mr. Roame said. In 1992, packaged products like these were an $82 billion industry. Ten years later, they produced $800 billion in sales. Today, they are a $1.5 trillion business.
Though target-date and target-risk funds were once considered favorites of the defined benefit program, advisers are increasingly using them in taxable accounts, Mr. Roame said.
"As advisers, we go back to what we like," he said. This means solid funds with good track records, and programs that offer solutions and support.
For boomer clients, the goal is long-term security more than a new strategy, and the means are secondary.
"My clients come to me as a coach to develop a game plan," Mr. Freiman said. They "could care less about what's out there. They come in and say, 'Do this. Now let's go play golf.'"
