Wealth Management
(New York)
Every investor knows ETF have surged in popularity. However, one the big questions of major importance in the industry is “who owns them?”. The answer is, mostly, investment advisors. There has been a major shift in the ETF industry since the Crisis, as ETF consumption by Investment Advisors has surged as AUM in that area has grown. What’s more, that holding is rocketing year on year, with total AUM ownership in the segment growing by around $400 bn between 2016 and 2017. Brokers, by contrast have seen their total share of ETF ownership plummet, from 16% in 2007 to just 2.2% now.
FINSUM: Retail still owns the majority, but investment advisors have been the major growth driver for the segment and their influence is widening considerably.
(New York)
It was long awaited, but still hit the market like a hammer. It was one of those things that you can prepare for over a long period, yet are inevitably shocked when it arrives. In this case, it was the long-awaited release of a zero fee index fund. Fidelity was the first to do it, and while it was anticipated, the move is likely to have far-reaching effects on the industry. For instance, one of the big changes is that large index funds will likely no longer pay licensing fees to the indexes themselves. At the same time though, indexes will proliferate for more narrow and niche areas designed to track all manner of themes. Fees will likely continue to fall, even on the more complex products.
FINSUM: Asset management is seeing a very serious race to the bottom, which is reflected in share prices lately. Two thoughts come to mind. Firstly, those with huge scale will be the big winners as the industry grows more consolidated. Secondly, how long before retirement funds seeing a reckoning and a big move out of expensive products (they are paying an average of 61 bp in fees)?
New York)
Fidelity made history this week by introducing the first zero fee funds, which will track very broad self-indexed markets. Fidelity’s move is somewhat of a ploy, and definitely a demonstration of scale, as the company has many ways to profit from a customer once it has them in the door. But don’t be fooled, as fees aren’t everything. In fact, there are significant differences in performance even between index trackers of the same benchmark, like the S&P 500, and the differences between them can add up to a whole lot more than the difference in fees. For instance, Schwab and Vanguard already have broad index trackers at 3 and 6 basis points of fees, so hardly a big difference to zero, especially if their performance is better.
FINSUM: “Zero” definitely changes things, but once you are in the sub-15 bp fee category, performance is going to make a bigger difference than fees.
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(Boston)
The moment that many asset managers have been dreading has finally arrived. Fidelity announced yesterday that it was slashing prices on many of its funds, and crucially, offering two new index mutual funds with no fees and no minimums. Thus, the Rubicon has finally been crossed—the first broad index funds with zero fees, and no minimums. Many top asset management stocks fell considerably on the news. Remember that asset managers can still make money on funds with zero fees—through stock lending—but they need considerable scale to make that money meaningful.
FINSUM: It was only a matter of time before this happened. We expect Vanguard will follow suit quite soon, as will BlackRock, as lower fees have been by far the biggest selling point in the market for years.
(Washington)
There is a lot of excitement right now about the possibility of the new capital gains tax cut. The Treasury is looking into whether to effectively cut the capital gains tax rate by allowing investors to account for inflation when reporting their gains. The cut is estimated to amount to $100 bn over the next decade. However, the Treasury is uncertain if it has the authority to make the cuts on its own, a move it would undertake by simply redefining the meaning of “cost”.
FINSUM: So evidently the first Bush administration looked into this in the early 90s and decided that the Treasury did not have the legal authority to make this change on its own.
(Washington)
The US broker community is currently growing increasingly concerned about the SEC’s new “Regulation Best Interest”. On top of anger over the rules governing the use of titles, brokers have become increasingly worried about a part of the SEC rule which essentially mirrors the DOL’s best interest contract exemption (BICE). The problem is that there are rules governing conflicts of interest that are very similar to the DOL’s, such as brokers having to take steps to resolve conflicts, and minimize compensation incentives for certain products. According to one lawyer representing brokerages, “We believe the commission should replace the DOL rule-based preamble provisions on mitigation and elimination of conflicts with a simple principles-based statement”.
FINSUM: When the rule was first debuted, the general industry reaction was positive. However, the more everyone has dug into it, the more stringent the opposition has become.