Over the past two years, the industry has seen a growing trend of platform rationalization across the board for broker-dealers, with several in the top tier seeking to offer advice as part of their value proposition, similar to what the end investor receives. The supermarket approach of the early 2000s was expensive to maintain, and research coverage was relegated to a small list of preferred mutual fund products.
When it comes to cutting funds from their offerings, broker-dealers appear to have determined that “Quality advice over Quantity of offerings” is the way forward. While providing a diverse offering of funds for clients remains a key business component for these institutions, many are finding it inefficient to have funds that are similar to each other on their menu simply for the sake of having more to offer. Today, broker-dealers are focusing on offering high-quality products that demonstrate the Broker Dealer’s investment advice value and justify why clients pay a fee for that advice.
To ensure that they’re providing their clients with the best advice, several of these dealers that have undergone platform rationalization have expanded their teams of analysts or have a synchronized relationship with research-providing organizations, such as Morningstar, to provide coverage of all funds offered. However, this research doesn’t come for free and vetting thousands of funds can prove to be expensive. Therefore, rationalization exercises are a complex balance of cost-per-fund for research and selection breadth for the advisor — and ultimately their end investor. From there, broker-dealers can consolidate the assets across other providers onto the products that have the best combination of scale and track record.
What about clean shares?
So far, clean shares haven’t been seen to have an effect on platform rationalization; there doesn’t seem to be a strong correlation between a broker dealer’s use of clean shares and the number of products they support on the menu. Instead of influencing which products to consolidate to or replace, the clean shares are more of an operational decision to reorganize how the fees are structured. The clean shares help to provide a uniformity across the menu to make it easy to see how the fees are structured, communicated, and billed. It should be noted that if one of the platforms that have recently moved operationally to a clean share model and a platform rationalization exercise were to occur, support for that type of structure would be a must have to survive the change.
What are the implications for operations?
As far as operations are concerned, they need to ensure that their investment oversight teams are provided the highest quality data in a timely and consistent manner. With broker-dealers aiming to trim budgets through platform rationalization, the data that is provided must be top-notch and accurate in order to accurately and consistently find the right line up of product that provides the best menu for the advisors to choose from.
The importance of the investment oversight teams has never been clearer. Provision of high quality, timely and accurate data to power research is paramount when mission critical decisions about menu structure, depth, and breadth are being considered.
We welcome your thoughts.
Whitfield Athey is CEO of Delta Data Software. His role at Delta Data is focused on growth of the product base, satisfaction of clients and scalability of the organization.