In a recent interview,
Jack Brennan, former CEO and current Chairman of The Vanguard Group, touted the importance of investors having a financial advisor. Consider the fact that this advice came from the man that built the mutual fund behemoth on a do-it-yourself ethos, and whose message was that individual investors did not need high-priced fund managers and stock-pickers, and would be better served over the long term by using low-cost index funds. So what explains this seemingly change in stance? Brennan sees the combination of a low-cost and sector ETFs and the shift in advisors to an asset-based fee structure as creating a symbiotic and mutually beneficial relationship. When market exposure becomes essentially free or next to free, firms can focus on the more critical aspects of the advisor-client relationship -- college savings and retirement planning -- rather than commission generation.
Brennan explains, “What’s happened is the value proposition of the advisor has gone up a level to strategy, such as helping people really do planning and helping people manage those plans and stay on that plan.”
Of course, Vanguard itself stands to benefit. As former sell-side or commission-based brokers break off to set up independent wealth management firms, the first thing they do is jettison the high-cost mutual funds they used to push; instead, they use low-cost ETFs to reduce internal expenses of client portfolios. In this sense, firms like Vanguard, BlackRock
(NYSE:BLK), and State Street
(NYSE:STT) have become great partners to wealth managers and financial advisors.
Schwab’s No Fee Gambit
It was interesting to see Charles Schwab
(NYSE:SCHW) launch a no-fee ETF OneSource platform last week. My initial thought was that this was a somewhat desperate move to keep assets under management and a way to offset the decrease in daily trading volume. But upon further review, I see that Schwab is getting distribution fees from partnering with the firms, which cover 105 ETFs. However, notably absent are Vanguard and BlackRock, which include some of the largest ETFs such as the Vectors and the iShare family.
This move by Schwab takes a page out of its own playbook; the company pioneered its OneSource no-fee mutual fund family in the 1980s, and it spurred incredible growth. I don’t expect the same trajectory now since I think this will maintain rather than gather accounts. But on the whole, it is a positive.
A bright spot has been option trading, which saw volume grow by 15%-20% in 2012. Both Ameritrade
(NYSE:AMTD) and Schwab made wise acquisitions of ThinkorSwim and OptionXpress, respectively, several years ago to bolster their options platform.
Another puncturing of my initial bearish take came last Friday as Schwab and its two main online competitors, Ameritrade and E TRADE
(NASDAQ:ETFC) all reported a 5%-6% increase in daily average revenue trade (DART) for January 2013 versus the year ago period. That said, the increase was likely spurred by the big inflow into equity funds early in the year and it may be short lived. A new era of frenetic day trading or the possibility that retail money is about to come gushing back into the market are unlikely. The low-interest rate environment -- in which AUM earns little -- is likely keep profit margins under pressure.
While the supermarket approach to financial services received a black eye during the crisis, many big banks did not get knocked out as they were deemed too big to fail. They now seem positioned to once again leverage their size through cross selling. On Monday, an article in the New York Times' Dealbook
noted how Morgan Stanley
(NYSE:MS) has issued an order to its investment banking and trading units to work closer with its army of regional branches and Smith Barney retail brokers. Evidence that this can work came in the form of Bank of America’s
(NYSE:BAC) recent announcement that its leveraging of its Merrill Lynch sales force has helped grow 401k assets by 23% to over $1.1 trillion in 2012.
There has also been renewed activity that has provided more and special access to the markets including IPOs, private placements, and alternative investments, which may be good for the bank stocks' bottom line and shareholders. But it suggests actual clients should be very careful with who they entrust their money -- broker or advisor, beware.
Disclosure: Minyanville has a commercial relationship with E TRADE.
No positions in stocks mentioned.
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