United Capital pivots away from mutual funds to proprietary asset management program

Firm sees new way to cut the middleman, product fees for clients while capturing top investment ideas

May 14, 2015 @ 12:34 pm

By Trevor Hunnicutt

United Capital Financial Advisers, one of the larger independent wealth management companies, is moving a growing share of its investors' portfolios out of mutual funds and into cheaper separate accounts it manages itself.

And in a twist, the firm's managers are using the ideas of traditional asset managers, asking them for a handful of their best, highest-conviction ideas, and then doing the trading themselves.

The firm hopes the effort will result in a best-ideas portfolio with a better chance at delivering returns exceeding the market's average than an index-hugging portfolio, at a low cost. The investment management fee for investors is 35 basis points, compared with the 70 basis points that stock fund investors paid last year, according to the Investment Company Institute, a trade group.

In all, about 20% of the firm's $14.2 billion in assets are now deployed in these portfolios instead of traditional mutual funds and separately managed accounts, said Rob Brown, the chief investment officer at United Capital.

Mr. Brown declined to provide returns on the portfolios for compliance reasons. In addition, he said the firm's advisers are pleased with the program, now in its second year. While they are encouraged to use it, they are not compensated for putting client assets into it, he said.


The shift was a response to the challenges that have caused many fund managers to underperform the market, he explained.

“The problem is not lack of opportunity. The problem is not lack of talent. The problem is, not in all cases, but in many cases, the structure of the mutual fund,” said Mr. Brown.

In Mr. Brown's view, that means costs — management fees, turnover, back-office administration, tax inefficiency and perhaps most importantly, over-diversification — that eat up the value managers can add.

“They've got 8 to 10 brilliant ideas, but then they have 320 stocks in their portfolio,” he said.

Mr. Brown said there are still certain investment strategies for which mutual funds work best today. For example, global fixed-income markets are more complex to navigate than stocks, giving a significant edge to specialist traders employed by fund shops, he said.

Declining to name fund companies that have turned him down, he said it isn't likely he'll be able to convince large asset managers to share their best ideas with him any time soon. The firm is currently working with money managers who are comfortable with the idea and have good ideas. Mr. Brown said one of them is Edinburgh, Scotland-based Dundas Global Investors.

“We have gone to portfolio managers at some of the large-name fund companies in the world, but that's more the exception than the rule for obvious internal business reasons,” said Mr. Brown. “If a portfolio manager is running a couple mutual funds with $10 billion, does their parent organization have a separate agreement with us where they're sending us their 10 best ideas? That's going to be a rare circumstance whether they're going to be comfortable with that.”


United Capital, a 65-branch wealth manager based in Newport Beach, Calif., is just one of many advisory firms revisiting the choice to invest their retail clients' assets in mutual funds.

Among one of the more well-documented result of that reevaluation has been the rise of exchange-traded funds and the boutique portfolio managers who trade them.

ETFs have also been more widely used in adviser-sold “wrap” accounts to keep overall fees low while maintaining the share that goes to advisers and their firms, according to Christopher Thompson, head of the U.S. retail client group at AllianceBernstein, a New York-based manager of $474 billion, including mutual funds.

“It's classic fee compression,” Mr. Thompson said.

But even providers of low-cost ETFs face a threat, according to Steven D. Lockshin, a wealth adviser and serial entrepreneur who is principal of AdvicePeriod, chairman at Convergent Wealth Advisors and an investor in Betterment.


Speaking at an industry conference last month in Las Vegas, Mr. Lockshin said brokerage services have improved to the degree that more advisory firms will be able to more easily issue fractional shares of a diversified portfolio of stocks while retaining more control over processes, such as tax-loss harvesting, used to improve a portfolio's after-tax returns.

Those technologies could allow advisers to achieve better results for clients than mutual funds and ETFs, which are responsible for $33 trillion in wealth.

Anticipating that competition, the asset management industry has pushed regulators to reduce the extensive disclosure requirements on actively managed exchange-traded products.

The Securities and Exchange Commission approved one of the proposals, NextShares, which is backed by the mutual fund house Eaton Vance Corp. The Boston-based manager of $303 billion says the ETPs can improve on the tax efficiency of funds and can lower holding costs by eliminating the need for mutual fund service providers, particularly transfer agents. NextShares have not yet started trading.


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