National wirehouses are slowly moving out of cash and fixed income, which currently comprise nearly a third of their portfolios—3.9% and 25.8%, respectively—according to “Distribution Dynamics: Investment Selection,” a report from RepThinkTank, a consulting alliance for the financial services industry made up of FUSE Research Network, Momentum Partners, The Oechsli Institute and Registered Rep magazine.
Equity funds, particularly emerging markets and international, will absorb the bulk of that money, RepThinkTank found through its survey of more than 1,000 advisers. “International equity specialists that get ahead of this transition will be positioned to gain assets,” the report said.
Over the past year, wirehouse advisers’ No. 1 reason for altering asset allocations was changing risk/return expectations, followed by regular rebalancing and tactical adjustments. Few brokers said they adjusted client portfolios as a result of a customer request.
When using screening/selection criteria to select products and services, wirehouse reps’ main reason is to find the highest-performing funds based on relative returns. They also seek out asset managers with good reputations, followed by strong fixed income characteristics and absolute returns. Interestingly, fees and expenses ranked as their fifth most important criteria, a contrast from the financial services’ overall ranking of No. 1.
Brokers also surprised by saying they rarely screen against Morningstar ratings or assets under management. However, they are more likely than the industry average to screen against style constraints and manager tenure.
Asked which fund companies have the best overall positioning at their brokerage, the reps cited American Funds, followed by Franklin Templeton, PIMCO, BlackRock and Lord Abbett. In terms of specific asset classes, the leader in the domestic equity specialty class is Ivy Asset Management. For both international equity-core and fixed income-muni, the leader is Thornburg Investment Management. OppenheimerFunds was cited as the breakout manager for international equity-emerging markets and fixed income-global/international. The other three standouts are Pioneer Investments (fixed income-high yield), Nuveen Investments (fixed income-municipals) and Royce Funds (domestic equity mid/small cap).
Despite the loudly predicted demise of the wirehouse channel and its culture, the report stressed, the slight reduction in the size of the industry is primarily due to the weeding out of weaker producers. Brokers who still work at the bulge-bracket wirehouses, however, have been jumping ship to other large houses—especially teams. Thus, RepThinkTank advises fund companies to target teams since they control the most money—and to position their firm to stand out from all of the various types of investment products that wirehouses now sell.
In fact, in terms of expected changes in product usage over the next 12 months, national wirehouse reps cited mutual fund wrap programs, followed by exchange-traded funds, separately managed accounts, life insurance and annuities.
“Although approaching solo practitioners in the wirehouses may be easier, asset managers must seek access to teams, or at least the decision-makers on teams, for two reasons: 1) The number of solo practitioners in the wirehouses is shrinking, and 2) The majority of assets reside with teams,” the report said.
“Fund managers must market their merits as an asset manager and expand their competitive positioning beyond the parameters of the mutual fund universe,” the report continued.