Morningstar Advisor - December 2012/January 2013 - (Page 51)

ourselves as an industry, and we have to challenge our advisors. If you ask any advisor, I’m certain they would say, “Listen, if everybody’s going to play by the same rules, I’m OK with disclosing all of my compensation.” I think most advisors would be surprised that their clients have no clue how they’re paid. But ultimately, it’s the best place for us to go. The wirehouse community is OK with it. Burns: There’s a lot of talk about the fiduciary standard. Where do things stand with the regulators, or does it even matter? Hatch: It’s a lot of hot air. Anything that we do on the fiduciary side is good, but come on. All of the advisors in this room who don’t believe you’re fiduciary, please raise your hand. Not a single one of them will raise their hand. They all grew up thinking that their job was to take care of their clients. “The most important thing is what happens with my clients.” That’s how advisors think. They embrace what we think of as their fiduciary obligation. I’m all for what Congress is doing. If it helps consumers have confidence in the system, then I’m for that. But it doesn’t help advisors. They already think they’re fiduciaries. The vast majority of them act every day in that capacity. Burns: Mark, when you’re out there talking to If you want to know what’s going to happen to ETFs in the retail world, just follow fee-based accounts. Wherever they arise, ETFs follow. Wherever they don’t exist, no one sells ETFs. So, I think the world does change with fee standards being different. Mark Wiedman market reality almost anywhere outside the United States today. So, we also have many relationships with big distributors, because that’s ultimately how they get paid. In Europe, for example, you will see that, typically, mutual funds will cost 175 basis points or so. Canada is even higher, 220 or so. All of the economics of paying the advisor or the distributor, as opposed to the actual alpha generation or portfolio management, are completely obscure to the end investor. So, I don’t think we have a perfect world here in the United States. But it’s pretty good by most standards. Hatch: Transparency is good. It’s just like provide better value, and it’s going to be a better value for clients. When it becomes a better value for clients, we have more people who come into the business. Business as a whole will ultimately benefit by driving and embracing transparency rather than trying to move away from it. It’s the difference between a communist society and a democratic free-market society (laughter). Burns: This move will have a very big impact on the economics of your platform. Hatch: Sure, it hits our economics. There is only so much money to go around. Transparency will drive more of that out, not give us more. But we do have to get to a better place. We do have to challenge clients in the market, how are you dealing with trust? How should we get people back into trusting investing, trusting advisors? Wiedman: It’s about fee structures and competition. It drives us to a place where we transparency. It’s much more important than legal standards. As fee structures change behavior changes. My dad’s a doctor. He is a real fiduciary. He’s 83, still practicing medicine. He is old-school and cannot believe any of the shenanigans of the last 30 years of modern medicine. He watches medical reps walking in to offer various training seminars and the like to physicians. That modifies their behavior. They are physicians who are still acting as a fiduciary, but they’re perhaps favoring this drug over another one. Fee structure changes behavior. MorningstarAdvisor.com 51 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December 2012/January 2013

Morningstar Advisor - December2012/January 2013
Contents
Contributors
Letter From the Editor
What Stands Between Me and Stupid
Why Do You Use Dynamic Funds of Funds?
Serving Clients and Community
How to Pick an ETF Managed Portfolio Strategy
Tactical View of Risk
Investments á la Carte
Investment Briefs
Unbundling ETF Managed Portfolios
Risks Loom Over Telecom Industry
Outsourcing Asset Allocation
ETF Managed Portfolios on the Rise
Age-Based Options Take Over 529 Industry
How the Landscape for Advisors Is Changing
Mark Egan Embraces Volatility
Alpha, Beta, and Now … Gamma
Performance Gaps
Gains in Momentum
Companies Where Management Teams Add Value
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Once and Future King

Morningstar Advisor - December 2012/January 2013