As seen in FUNDfire: DOL Rule Adds to Downward Pressure on SMA Manager Fees

The following article was originally published in FUNDfire

by Danielle Verbrigghe November 28, 2016

Broker-dealer preparations to comply with the impending Department of Labor (DOL) fiduciary rule for retirement advice, set to take effect in April, is likely to drive more downward pressure on fees for separately managed account (SMA) managers and other product providers, industry observers say.

“It’s a perfect storm of DOL, the active-passive debate and now the robo influence,” says Russell Parker, president of rpmAUM, a firm that consults with asset management firms about marketing and distribution. These elements are all converging to heap pressure on active managers to justify their fees.

“I think it’s going to bring to bear pressure that can only go one way on price,” Parker says. “The pressure is definitely downward and it cuts across more than SMAs.”

As distributors re-evaluate their product lineups and pricing, the competitive pressure facing SMA managers and other product manufacturers is mounting.

“It really puts an awful lot of pressure on what is the value proposition to investors,” Parker says. “Those that don’t have strong performance are going to really struggle in the distribution mix.”

In many ways, the rule has just accelerated trends already underway, says Steve Dunlap, president and COO of FolioDynamix. He notes an existing trend toward lower cost products currently underway.

Advisors are already facing pressure to justify the value they deliver for the explicit fee they charge, beyond just asset allocation and manager selection.
“If your [value proposition] is charging 100 basis points for making a portfolio of mutual funds, you’re already obsolete,” Dunlap says.

Driving down the costs of the products on offer is one way advisors can justify the explicit advice fee they charge, he says.

“Then the customer will feel there is value,” Dunlap explains.

In preparation for the rule, asset managers have been re-examining product suites and pricing to make sure they are in line for what distributors are demanding, says Matt Caulfield, executive v.p. of business development and client experience at Archer, the SMA operations and technology firm, which was formerly known as Market Street Advisors.

“We’ve had quite a few conversations with asset managers and their response to the DOL rule is that they’re looking at their product suite and looking at price points along their product suite,” Caulfield says.

Some managers are also reevaluating minimums for SMA strategies and looking for ways to bring minimums down to what distributors are requesting, he says.

“I think the managers are taking their cues from their distribution partners,” Caulfield says. “Sponsors, the broker dealers, are looking across their platforms and asset managers and I think there is a competitive environment where asset managers are re-evaluating their fees and taking notes from their sponsors.”

SMAs could benefit from advisors shifting assets out of commission accounts into fee-based advisory programs. And some institutional or mutual-fund focused shops are responding by developing or considering developing retail SMA or model-delivered versions of their strategies, Caulfield says.

“We’re seeing institutional managers, some of the largest brand managers, for the first time entering the SMA space,” Caulfield says.

Managers with significant dual-contract SMA business have also been re-evaluating their fees and minimums, Caulfield says.

“We’re also seeing managers look at their dual-contracts and the minimums, and are looking at reducing fees,” Caulfield says.

And these trends have created opportunities for SMA ops outsourcers, like Archer, as managers look to enter the business, he says. Other managers who already play in the SMA space are looking to increase efficiency and move to a fixed-cost model, as they prepare for continued pricing pressure.

“As asset managers deal with responding to their distribution partners’ acceptable price points, they will continue to look internally to make sure they’ve got the right technology, the right platform and service model, to support those products,” Caulfield says. “At some point, I don’t know where the price point could be compressed further.”

Parker, Dunlap and Caulfield agree that it’s unlikely the new Republican administration could halt the momentum already in place as firms continue to prepare to comply with the new regulation.

“It’s reasonable to expect that the proverbial genie is out of the bottle on the DOL [fiduciary rule],” Parker says.

“Everybody is preparing for this change and it is going to irrevocably change the revenue models of firms,” Parker says. “That trickles down to all kinds of product areas.”

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