Morningstar Magazine - June/July 2017 - 93

Disruption or Fad?

conference room and go through a binder. Meeting
face to face can mean a lot of different things.

Rothschild: I'll name a trend or perception, and you can

say "Yes, I agree" or "No, this is a passing fad."
The first one is gamification for financial advice. Is this
a trend that will continue?

Phillips: I hope it's a trend that continues. My
son got a degree in computer game design at NYU.
I think it's a way that we're going to reach out
to more people.

Phillips: I agree with Josh. I think that they want
more sophisticated, technology-oriented
communication, but it doesn't mean that they
don't want the face to face, especially as their
finances get more complicated.
Rothschild: What about the perception that indexing

is lower risk than active management?

Brown: Whatever it takes to get young people
interested in planning for the future and investing.
Rothschild: What about strategic beta? Is that a
disruptive trend or a passing fad?

Phillips: Indexing has become sainted and active
has become vilified. People are claiming
every great virtue you can put under indexing. But
it's not lower risk. It's lower cost; it's efficient.

Sironi: A passing fad, because it may not
necessarily fulfill our goals.

Brown: It's not lower risk; it's higher risk. The S&P
500 is the world's greatest momentum strategy.

Phillips: I think you're going to see a lot of active
management with strategic-beta products.
It's a way to deliver lower-cost opportunities.

Phillips: I would make a marked distinction.
The traditional index funds that Jack Bogle is
a fan of, where you buy and hold the whole

It's called Milestone Rewards. It's AUM fees that
decline over time to reward the client's fidelity
to their plan and their portfolio. It's a behavioral
nudge for sure. We're rewarding good behavior
on the part of our investors. Clients love it;
they love when they have six months left until the
next milestone.
Phillips: I think it's a great irony that the industry
is claiming to be more fiduciary-oriented because
it's moved from commissions to AUM. The
industry's been dragged kicking and screaming
from one compensation system to another
one, and the one they've been dragged to pays
them 50% more.

If clients were smart, they'd say, "I demand to pay
for your services in dollars, a flat dollar amount,"
but they're not asking that. If they're not asking
that, why is anyone going to voluntarily move off of
AUM to something that would pay them less?
Rothschild: What about sustainable investing?

Brown: The hype on ESG is so real it's going to be
an order of magnitude bigger than it is now.
The caveat is, in the end, every company in the S&P
will become ESG compliant, and it becomes
a redundancy. But there's a lot of room between
now and there.
Phillips: The key thing is that it's the people's
money, and they should have a voice in how it's
managed. This is a way that Main Street can
have access to corporate America and say, "Look,
we want a voice in how you're behaving with our
money." If the financial-services industry can
facilitate that, then it's an industry that can start
patting itself on the back.
Brown: It's part of a broader trend toward
evidence-based investing, rules-based investing.
Younger generations want statistics and
data to back up the way they're investing. They're
less interested in betting on the man with the
hot hands; that's what may disappear altogether.

market, that to me is a wonderful and legitimate
way to invest. When you start slicing and
dicing the market and you add leverage, then any
claim to low risk certainly goes out the window.
And usually low cost and tax efficiency as well.

will not meet face to face with an advisor?

Rothschild: How about the advisor fee structure?
Do you think the assets-under-management model
will prevail?

Brown: False. I'm going in an hour to meet my
millennial clients in Chicago. What they don't want
to do is meet quarterly in an oak-paneled

Brown: Speaking as a practitioner, I think we
created something that looks a lot like what
the future will look like. We're really proud of it.

Rothschild: How about the perception that millennials

Sironi: Personalization is the mantra. Everything
that makes investing personal makes sense. K
Laura Lallos is the managing editor of Morningstar magazine.

global.morningstar.com/Morningstarmagazine

93


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