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InvestmentNews celebrates the inaugural 5-Star Fund Providers who have achieved the designation following a ranking by hundreds of financial advisors and related professionals.
All of the six winners are standout all-round performers offering their clients unrivalled expertise and sound judgment, illustrated by all winners featuring in the Top 3 for at least one of this report’s criteria.
Longevity is something they all share, with half of the winners forming prior to 1937 and the last a relative newcomer after being founded 36 years ago.
Breaking down what it means in the industry to be a 5-Star Fund Provider is Thomas Ruggie, founder and CEO of Ruggie Wealth Management at Destiny Wealth Partners. His firm was recognized as one of IN’s Fastest-Growing Fee-Only RIAs in 2023 with a three-year growth rate of 234.8 percent and uses several of the winning Fund Providers.
Ruggie says, “The winners don’t surprise me and the main reason is not because of a particular great fund. They have a family of good options.”
To showcase what excellence means across the key criteria, IN explores and analyzes what moves the needle.
1st: American Funds 4.60
2nd: Vanguard 4.52
3rd: T. Rowe Price 4.46
The difference maker is ensuring that a fund provider’s name equates to a persuasive culture of competence.
“What stands out is not necessarily a particular fund per se, but does a company have a family of funds that have a good, consistent, strong track record?” says Ruggie. “It’s not just one particular fund, it’s a structure of having best in class across the board.”
It’s paramount for Ruggie and other industry big names that a provider’s reputation stems from specific metrics.
He adds, “When I measure performance, what I’m looking at is performance net of fees. It’s kind of tongue-in-cheek, but I always say I would pay a 10 percent fee if I knew I was going to still perform better net of fees.”
Fees influence reputation as historical performance shows that generally the less fees, the better the performance due to a reversion to the mean.
“You could look at Fund A and Fund B in one year, and there could be a big disparity in performance, but if they’re investing in a similar nature over 10 years, then that disparity probably narrows pretty significantly,” explains Ruggie.
Providers burnish their reputation by directly lobbying advisors via their army of salespeople and a cache of information of their various funds. This direct marketing strategy, which often involves dinner meetings and invites to high-profile events, has an indeterminable effect on reputation.
Ruggie admits, “If you were to talk to five advisors, you would probably get a different answer than me. Every conference I go to, every night there’s not a conference event, I get invited to a dinner from an investment company and they’re going to do a small pitch on their company. I have people sending me gifts, basically hoping that I would reciprocate by taking their phone call.”
While the charm offensive can pay dividends, the top advisors aren’t blinded by glamour as they are acutely aware of their responsibility to their clients.
“I don’t want to go to a free show or sporting event,” Ruggie adds. “I approach it from a standpoint of I’d rather do my own research first because I don’t want there to be any bias in my decision-making of who I’m using and why.”
1st: American Funds 4.33
2nd: Vanguard 4.26
3rd: MFS Investment Management 4.18
On the surface level, all providers are transparent in terms of their returns and the assets under management. However, for advisors and those looking to make investments, there are other components to transparency, most notably around strategy.
Ruggie says, “I never put much weight into what they’re holding unless there’s something specifically that I’m looking for, perhaps if I’m looking for a tech fund. I want to see if they are holding a Microsoft, Google, Amazon, but are they holding smaller companies? That gives you an idea of directionally where they’re heading.”
Other details that play a factor are performance relative to the market and even how long fund managers have been in place.
“Again, what I look for is consistency, even if you’re in a fund that lost 20 percent in one year. Were they still in the top quartile versus their peers? If so, that’s probably a good manager,” adds Ruggie. “A manager could have a tenure track record, but another manager that’s only been there for two years – that’s a red flag for me because that could change that consistency of performance.”
Summing up the transparency factor, Ruggie, a leading light in the alternative investment space encompassing the likes of sports memorabilia collections, cites ice hockey legend Wayne Gretzky.
“They say he was so good because he knew where the puck was going, he wasn’t where the puck was. That’s what I try to do and utilize wholesalers to absorb the knowledge that they get from their companies to help determine directionally where they want to be going forward.”
1st: American Funds 4.68
2nd: BlackRock (iShares) 4.52
3rd: T. Rowe Price 4.45
Top advisors ask a series of questions when it comes to accessing funds:
Can I get the lowest cost?
Can I get the cheapest fee structure? (Typically, the cheapest fee structure has higher minimums.)
Can I get into that portfolio with higher minimums?
What stands out about the 5-Star Fund Providers is they work with advisors and waive some requirements.
Ruggie says, “They tend to do it if you’re putting $20 million with them, they’re not as concerned about a $10,000 account minimum.”
At a quick glance, fees may appear to hinder accessibility, but it depends on what the advisor is gaining access to.
“I want best performance net of fees and in some cases, it makes sense to pay higher fees to a mutual fund if you get a good consistent manager,” notes Ruggie. “I’m typically getting institutional shares, the absolute most cost-effective shares for our clients.”
1st: Vanguard 4.48
2nd: BlackRock (iShares) 4.48
3rd: Fidelity 4.47
No matter how experienced finance professionals are, there will always be knowledge gaps. They may be experts in certain sectors, but only have a rudimentary understanding of others. This is something Ruggie relates to. “I’ve been doing this a long time, but sometimes you don’t know what you don’t know,” he says.
This is where 5-Star Fund Providers shine, as they have the resources to offer best-in-class investments. Due to their resources, they relate to advisors their strategic positions and most importantly, the rationale behind it.
“What I look for in a relationship is somebody that’s going to provide me with insight based on their knowledge or their firm’s knowledge of what’s going on. Then, I want them to tell me how they would recommend that particular decision to take advantage of it,” says Ruggie.
1st: American Funds 4.49
2nd: T. Rowe Price 4.24
3rd: MFS Investment Management 4.21
There’s a solid argument that active management could be the most important criterion for a 5-Star Fund Provider. It’s the culmination of all the other elements of IN’s 5-Star winners. It relies not only on skilled and adept managers, but also on market-leading research and analysis. It is all fueled by an internal culture of excellence that links to a provider’s reputation and transparency.
The element that matters to advisors is showcasing active management to not only offer confidence but also attract more investment.
“Recently, I was on a four-plus-hour flight, my folder was about four inches thick of stuff to get caught up reading on, and I was able to get through it all,” says Ruggie.
What he was poring over was information and updates from the funds he is invested in. It goes back to the belief that the performance of two large-cap funds may have differed last year, but over 10 years, the difference will likely be relatively small.
“I’m a believer that strategy trumps performance, and so what’s more important to me is the strategy that’s put in place and the adjustments of allocation based on where that proverbial hockey puck is going.”
This is the crux of active management and by extension what it means to be a 5-Star Fund Provider.
“I read a lot of the information that’s sent to me, but companies are so great at saying, ‘Hey, we’ve done this and look at what our performance is.’ I want to gain insight as to where they are going, not where things have been.”
InvestmentNews surveyed its full readership of financial advisors and related professionals between Nov. 20 and Dec. 12, 2023 on 19 of the largest fund providers based on assets. Self-identified users of the providers rated them on a one-to-five scale on the following dimensions: reputation, transparency, ease of access, breadth of investment options, and active management. The 5-Star Fund Providers were identified as those ranking in the top third based on composite average and servicing at least 8 percent of survey respondents.
