What We’re Reading on the RIA Industry

Q1 2019

Asset Management Industry Trends Wealth Management

Much of the sector’s recent press has focused on the current market environment as well as practice management issues for RIA firms, so we’ve highlighted some of the more salient pieces on these topics and a few others that are making news in the investment management industry.

Asset Management’s Squeezed Middle Faces a Bleak 2019

By Paul J. Davies, WSJ

Publicly traded asset managers had a rough year in 2018, with all segments of the industry underperforming the broader market (which itself did not fare well).  The entire industry was negatively impacted by declining asset prices and client de-risking during 2018, but “old fashioned” active managers suffered the most.  These managers are being squeezed by low-cost index fund providers on one side and high-cost alternative asset managers (which have an easier time justifying fees) on the other.

Josh Brown’s Tech Advice for Advisors: Calm Down!

By Bernice Napach, ThinkAdvisor

While tech investment is undoubtedly important for wealth management firms, Josh Brown, CEO of Ritholtz Wealth Management (a $700M AUM New York-based RIA), argues that not every wealth management firm needs to be investing in its own robo-advisory platform.  According to Brown, there will continue to be a place for human-generated financial advice even as AI and robo-advisory platforms become more advanced.  And since the robo-advisory industry will very likely be dominated in the future by today’s industry giants (Vanguard, Betterment, Schwab, Fidelity, and Merrill Edge, for example), smaller wealth management firms may be taking an unnecessary risk by spending millions to develop their own proprietary in-house tech platforms.

Active Funds Are Winning (in Bonds, That Is)

By Dan Weil, WSJ

It’s no secret that many active equity managers have struggled to outperform their benchmarks, but the same has not been true for active fixed income managers.  Actively managed open-end bond mutual funds and ETFs have outperformed their benchmarks over the last one-, three-, five-, and ten-year periods.  Much of this outperformance over the last 10 years has come from active managers strategically lowering duration versus the benchmark in expectation of the Fed’s interest rate increases and strategic overweighting to riskier bonds which have rallied over the last decade.  While the recent outperformance is a good thing for active fixed income managers, historically these active managers have tended to underperform their indices when the economy turns south.  And while recent outperformance provides some justification for the higher fees of actively managed fixed income products, investors have still voted with their feet in favor of passive funds, which have seen higher inflows than active fixed income funds in each of the last five years.

Goldman Sachs: Investors Need to Get Back to Stock Picking

By Patti Domm, CNBC

The current macro environment may be conducive for active managers, according to strategists at Goldman Sachs.  January asset flows indicate that investors may agree: during January of this year, ETF outflows were $32 billion compared with only $8 billion in outflows for mutual funds, bucking the normal trend of active to passive.

5 Ways to Attract Top Talent to Your RIA Firm

By Lisa Salvi, InvestmentNews

Attracting and retaining top talent is critical for the ongoing success and growth of RIA firms, but it is not so easy to do, particularly given the current tight labor market and aging industry labor force.  Lisa Salvi of InvestmentNews offers five ways RIA firms can increase their ability to attract talent, which includes creating a value proposition that appeals to employees, revamping web presence, organizing the interview process, considering compensation (both amount and form), and streamlining onboarding.

How to Cope in a World of Lower Returns

By Charles Paikert, Financial Planning

Due to factors such as an aging population and a slowdown in productivity, the outlook for future equity returns may be lower than long-term historical averages, according to Dr. Richard Marston, professor of finance at Wharton.  With the prospect of lower public equity returns going forward, private equity may be an attractive investment choice for many Ultra-HNW individuals, according to Marston.  While future PE returns face many of the same pressures as public equity, historically PE returns have outpaced public equity returns—and even if the absolute level of PE returns comes down, the gap between PE and public equity will likely persist, says Marston.

In summary, publicly traded asset managers performed poorly driven by the equity market slump last year (although markets today are up significantly from December’s lows).  While recent market conditions have impacted share prices for asset managers, they also have implications for management styles and asset allocations going forward.  The current market environment may be conducive to active equity management, given a relatively stable macro outlook and more patient Fed stance.  Active fixed income managers have outperformed their passive counterparts over the last decade, but that could change if the economy turns south.  On the practice management side, attracting top talent and making appropriate investments in technology remains a key concern for many RIAs.