Challenges ETF Issuers Face In Fee Based RIA World

The Marrs Group is a consulting firm working closely with fund sponsors and wealth managers to help them grow their asset base in a changing advisory industry faced with new regulation and fee compression across the board.

Brandon Marrs, founder and CEO of the company, tells us what ETF issuers and strategists are facing, and some of the advice he has for them as they look to reach more registered independent advisors.

ETF.com: Why did you get involved with helping fund issuers and wealth managers adapt to a changing reality in the advisory business?

Brandon Marrs: I was a national sales manager at an alternative investment firm for seven years. I oversaw a team of 15 RIA sales professionals. And while I was there, I saw a need within the asset management industry to raise capital from the RIA channel.

I found that a lot of firms were not necessarily going about it the right way. So I created the Marrs Group to consult and recruit for these firms to maximize sales within the RIA channel.

In a changing regulatory environment, and the new Department of Labor [fiduciary] rules and such, where you're seeing a large shift from a commission-based to a fee-based model, my goal is to work with firms to help them capture more assets in this environment.

ETF.com: How an advisor's compensated could impact the advice they give and the products they recommend, right? So is it more difficult for issuers to sell ETFs and other products in a fee-based RIA world?

Marrs: Not ETFs. I actually see ETFs as being one of the big winners of this changing regulatory environment. A lot of ETFs have a very low cost, and they're very easy and efficient for advisors to implement into their portfolios. ETFs will, in fact, win because of their low fee structure compared to many of the other investment vehicles out there.

ETF.com: How are advisors dealing with the fact that they're going to be making less money? The fee-based model is paying basis points—it’s a far cry from the 8% days.

Marrs: It’s definitely a far cry from the 8% days. But it's just the new reality of money management. A successful advisor that runs a nice practice on a fee basis can be a very, very profitable model. Especially as you start to grow your practice year after year, and you have a recurring revenue stream in place.

Fee-based advisors that are very diligent with their clients continue to grow their practices and bring in assets at a very good rate. At end of the day, doing right by your clients and managing on a fee basis in the long run will win over the commission model in the short term.

ETF.com: From an ETF issuer and strategist perspective, what should this shift to fee-based and a focus on fiduciary duty mean to their business other than more fee compression?

Marrs: Fee compression across the board is already happening. I can tell you that, for several of the clients I'm in conversations with, their fee models happen to be a lot different from what I used to see.

We're definitely seeing issuers and sponsors lowering their fees.

But there’s also consolidation. You’ll see different firms exiting the business or potentially merging with each other to create size and scale that can be more profitable in this particular environment.

ETF.com: What’s some of the advice you're giving to issuers and wealth managers looking to fit into a fee-based advisory world?

Marrs: Fees are a very large part of the challenge. Advisors are scrutinizing fees like never before. And that can impact product development, so that’s definitely one of the major things I always look at with an issuer. It's the structure.

From their perspective, marketing a product to a fee-based fiduciary-minded advisor is very different from marketing it to a commission-based advisor. And it takes commitment—full commitment from issuers and wealth managers to go after this advisory channel—because it can take six months to a year-plus to build. My job is to make sure they have the right structure and team in place to go in and talk to an advisor as a consultant rather than a sales guy.

There’s an ongoing big shift in the way sales are generated by people going in and having higher-level conversations with advisors, talking about portfolio management, why this or that makes sense for a client, as opposed to the high 7-8% days of commission.

ETF.com: If you're an issuer, what choice do you have but to conform and adapt? You can't just not work with the RIAs, can you?

Marrs: I completely agree. It's interesting though, because everybody wants RIA business since there's a lot of it out there. They're generally sticky assets that stay with your firm for a long time. The RIA channel can be a long-term revenue generator.

But at the same time, there's a lot of fund companies and wealth managers that might be still stuck in the old model. If they don't adapt, they’ll run into issues over the next couple of years. If they truly want to go after the RIA space and be successful, they have to hire salespeople that are going to have RIA experience. That's going to be a cost for the firm.

At the same time, a lot of these companies are used to a shorter sales cycle, and RIAs can take a very, very long time to make a meaningful impact. In this day and age of fee compression, this is money going out the door as opposed to coming in the door, which is why sometimes it can be a tough commitment for a fund sponsor.

ETF.com: Is there any downside to this shift to a fee-based advisory model? Could it impact product development or the quality of products brought to market, and ultimately hurt investors in any way?

Marrs: Lower fees are always good for the investor. But I do think there are potential longer-term issues. There have been some articles saying that a quarter of advisors are expected to leave the business because of these changes in regulation. It could become harder for the average “mom and pop” to find an advisor that fits their needs.

Some advisors will start to stray from offerings that have a higher fee structure. In my prior firm, we sold products that had a higher fee to them, and at the end of the day, we still made very good money for our clients. But in this day and age, advisors might tend to shy away from some of those particular offerings to make sure they aren't violating any sort of fiduciary rule. That could impact the products offered investors, and portfolio construction down the road.

ETF.com: What about robo advisors? Are sponsors and strategists asking more about robos? Are they more willing to work with robos? How do you see the robos fitting in to this new environment?

Marrs: That's a great question. And surprisingly, the word “robo,” in my role, never really comes up, to be honest. And for full disclosure, I am a fan of active management and the personal touch of an actual advisor, particularly in illiquid segments.

But I think robos have a long way to go. Market conditions have been very favorable, so we’ve yet to see how they perform during serious downturns. I know that they took some criticism during the aftermath of the “Brexit” vote.

For some clients, robos will fit a need, and they’ll potentially grow based on the changes in the RIA business. But they could also be challenged as some advisors leave the business, and others shift to very, very low-fee offerings, bringing their fees to competitive levels relative to the robos.

Contact Cinthia Murphy at [email protected]