Blackrock (BLK), the American funds, T. Rowe Price (TROW) and Vanguard will be some of the best business partners for advisers in the next decade, according to a new study by Morningstar.
The Chicago-based investment trackers evaluated the 100 largest fund complexes by assets under management. They looked at four criteria: Low costs, repeatable investment processes, adaptable business models and the ability to differentiate themselves from the competition.
The nine most promising partners for advisers:
Vanguard, Schwab (SCHW), DFA, BlackRock, American Funds, T. Rowe Price, Dodge & Cox,
Primecap Odyssey and Parnassus.
The behemoths in the fund business – Vanguard, Schwab, DFA, BlackRock, the American Funds and T. Rowe Price – all have the ability to offer low-cost products. A low-cost fund generally has a better chance of outperformance than a higher-cost one. And they will be under less pressure to lower fees in the future.
Institutional managers, such 401(k) plans and pensions, have long pressed for lower fees, which is one reason why Vanguard, BlackRock and T. Rowe Price – all big players in the defined contribution markets – have long since been so competitive on fund pricing.
Companies like Parnassus, Primecap Odyssey and Dodge & Cox have the ability to differentiate themselves from the giants, and also have the advantage of good active performance. Parnassus, in addition, has an ESG focus that sets it apart from the others. "Smaller companies are specialists and don't need to extend themselves too far," said Laura Pavlenko Lutton, one of the study's co-authors.
All nine companies have had consistent performance: Advisers don't like surprises in their portfolios. Index funds, obviously, have predictable investment processes as well as low costs. And the miserable performance of actively managed funds versus their passive counterparts has made it tougher for advisers to partner with active managers.
But this is not to say that there are no actively managed options for advisers, provided they keep fees low and have consistent processes and returns – as the American funds, Dodge & Cox and Primecap Odyssey have proven. Actively managed funds with consistent investment processes have fewer problems with succession planning when the founder retires.
Smaller companies face more difficult choices in the next 10 years, said Greggory Warren, co-author of the study. "What they have to decide is how to structure their fees so they remain competitive, or whether it makes sense to become part of a larger organization," he said. In a period of falling fee revenue, scale becomes vital to attracting new talent and paying for distribution.
Industry consolidation has begun and is inevitable, Morningstar says. "It doesn't matter whether or not the Department of Labor's fiduciary rule passes," Mr. Warren said. "The industry has already shifted. The challenge is not making the platform's plan vanilla and boring."
