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The Real Reason Why Advisors Are Moving to Passives

By Crucial Clips     March 21, 2018
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Feb. 28, 2018 

BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: Hi, this is Bruce Love with Financial Advisor IQ, and I'm here with Fielding Miller, who is the founder of CAPTRUST. So CAPTRUST has been around since 1997 -- 20-odd years. You must have seen quite a few changes in the industry.

FIELDING MILLER, FOUNDER & CEO, CAPTRUST: I have. I've seen a lot. We're seeing a lot of changes right now. One of the probably more interesting trends that we've seen, that's playing out as we speak, is how the asset management industry is getting rationalized. And it's kind of under attack from a lot of the passive products that are out there.

And there's been a constant prediction, as far as I can remember, that advisory fees were going to be under pressure for the services we provide. And what's really happened most recently is you've seen the asset management fees compress, but you haven't seen advisory fees go down.

Our fees have been pretty much flat as a percentage of assets for eight to 10 years. So I think that's interesting that there are periods of time when manufacturing is in favor, and they hold the power. And then sometimes distribution is in favor, and they hold the power.

And I think we're advisors being in the distribution lane. That's what we're seeing. We're in a very coveted role, and I think it's only going to get stronger. I think the demand for advice is growing by the day. I think the supply of able people to provide that advice is shrinking every day. So it's a pretty heady time to be in our business.

BRUCE LOVE: You've seen the questions and the service desires from clients changing. Or, have you seen them sort of staying the same over the last couple of decades?

FIELDING MILLER: Oh, it's changed a lot. The first part of my career, there was a hyperfocus on investment performance. You kind of differentiated yourself by your acumen related to investing. And I would say after the dot.com meltdown and then after -- that's kind of when people woke up to there is real risk out there and then follow that up with '08, '09.

People seem to have a completely different perspective on money and investing and what they're looking for from an advisor. And they're not chasing returns like they used to. They've seen how that story ends. It can end badly.

And they're looking for a much more holistic relationship. "How can you get me from Point A to Point B with the least amount of risk?" is much more important than, "Did I beat the S&P 500 Index?" Or something like that.

BRUCE LOVE: And I guess that also plays into the debate between active and passive then, doesn't it?


BRUCE LOVE: People aren't that interested in an active fund that's going to cost them more and not deliver massive returns.

FIELDING MILLER: Right. But a lot of the move towards passive is -- there's always been an academic argument that passive can outperform active. We're pretty agnostic to that argument. We feel like there's periods of time and there are sectors of the market where either makes the most sense.

But a lot of the reason that asset management fees have come down -- and the move towards passive has been due to the advisor, trying to shrink the total cost of the relationship down. And so they've made a pretty big shift. I think our industry as a whole has made a shift towards more passive investing.

BRUCE LOVE: So what do you think? I mean, what should advisors expect from the asset management industry then, moving forward? I mean, is it more of the same? Faster? Is it going to be harder to find good, active managers, because there's just simply going to be less of them? Or, will they be easier to find, because there will be less of them doing better jobs?

FIELDING MILLER: Well, I think asset managers are tricky in the sense that when they're emerging, you have really talented managers that are not necessarily discovered. And they're not managing massive amounts of capital. They can actually do a pretty good job of outperforming.

Once they amass the money, their game becomes keep the money. And so they tend to have what I would call benchmark-hugging strategies. Well, I think those days are over. I think just hugging the benchmark and charging more is really not going to fare well. I think you'll see more managers come out with more unique strategies, more concentrated portfolios.

Instead of having 250 stocks, they may have 15 or 20 to really be able to show their prowess. So I think that's coming. And I think the pendulum has swung awfully far towards the passive side, and it will swing back some. It's not going to swing back to where it was.

BRUCE LOVE: Fielding, thank you very much.