Morningstar Advisor - October/November 2013 - (Page 7)

Letter From the Editor The Changing Face of Distribution Jerry Kerns Follow Jerry on Twitter @ jerrykerns For years, Morningstar has been covering how advisors and investors are buying (and being sold) mutual funds and other investment vehicles. We’ve long said the industry needs to better align its business practices with the best interests of investors. Don Phillips has written that the “third rail” of the industry is criticizing fund distribution. Investors are being pushed into underperforming investments while paying huge distribution fees to fund firms. Yet few industry leaders are willing to publicly raise concerns. “No one bites the hand that feeds,” Phillips says. He more harshly criticizes the hypocrisy of the fund industry for embracing the fiduciary standard for itself but resisting the same standard for advisors. Too much business, you see, still depends on suitability-based distribution channels. (Two Phillips Curve gems on this topic are “The Third Rail,” October/November 2010, and “Twelve Bee, Huh?” December/January 2011.) Scott Burns, a former exchange-traded-fund analyst who is now Morningstar’s director of fund analysis, jumped into the fray with his article in the August/September 2011 issue, “Turning Fund Distribution on Its Head.” Being knee-deep in the ETF industry, Burns saw the transformative power of the exchanges delivering cheap, transparent, and liquid investments directly to investors without a costly sales or management layer. To Burns, this development was so powerful that he predicted it would completely change the structure of the industry. types of investments they want when they want them? Despite the ETF onslaught, mutual funds aren’t going away anytime soon. But what role will they play as more investors question whether they’re worth their costs? And in all of this, what is the future role of financial advisors? In this issue, we answer these and other questions that this era of change raises. First, Burns revisits his 2011 article, analyzes his predictions (he was mostly spot-on), and looks at what the future holds for fund companies and advisors (“Fund Distribution Has Been Turned on Its Head. Now What?” Page 36). John Rekenthaler, Morningstar’s vice president of research, then looks at how fund distribution has changed over the past 25 years (“Winning the Distribution Battle,” Page 40). The leaders back then were companies with the marketing muscle. The winners today are the firms that have institutional excellence. For our Morningstar Conversation, Burns and Rekenthaler talk with two longtime industry executives—Jim Jessee, from a “traditional” yet very successful fund firm, MFS, and Rich Dion, of Placemark Investments, which allows advisors to manage unified managed accounts. They discuss how fund companies, broker/dealers, advisors, and other industry players are all dealing with these changes (“Piloting New Channels,” Page 48). As an advisor, you’ve never had more investment choices for your clients. I’d like to hear your thoughts on where you see the industry going. You can find me on Twitter at @jerrykerns. Assets are still flowing into ETFs at record amounts, while rapidly leaving mutual funds. What does this all mean for advisors? Can ETFs and other new products and platforms fulfill their promises of directly offering investors the 7

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013

Morningstar Advisor - October/November 2013
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
Investment Briefs
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win

Morningstar Advisor - October/November 2013