PHILADELPHIA — After years of looking after the back-office needs of its mutual fund and exchange traded fund clients, ALPS Fund Services Inc. is itself getting into the advisory business.
At first glance, it appears to be a risky move.
There is the potential that by entering the advisory business, Denver-based ALPS could endanger the relationships it has with clients for which it performs back-office functions, industry experts said.
Careful treading
But ALPS, which in April launched five asset allocation portfolios comprising ETFs for use by insurance companies in their variable-insurance products, is entering a segment of the market that makes that scenario unlikely, said Howard Schneider, president of Practical Perspectives Inc., an industry consulting firm in Boxford, Mass.
Ibbotson Associates, a subsidiary of Morningstar Inc. of Chicago, is the subadviser for the portfolios. ALPS Advisers Inc., a unit of ALPS Fund Services, is the adviser.
“I don’t see it as too much in conflict, because they won’t bump up against too many of their clients,” Mr. Schneider said. “Should they go into the mutual funds side of the business, that could lead to problems.”
That may depend upon the product.
ALPS has signed an agreement to build a product registered under the Investment Company Act of 1940 “that allows us to invest in listed
private equity,” said Corey Dillon, director of the firm’s institutional advisory services.
The act regulates such entities as mutual funds and ETFs that invest in securities.
Mr. Dillon wouldn’t go into detail about the product, but whatever form it takes, it is unlikely to cause ALPS to come into conflict with its established clients, he said.
Currently, the only retail product that gives investors access to listed
private equity is the PowerShares Listed Private Equity Portfolio ETF (PSP), from PowerShares Capital Management LLC of Wheaton Ill.,
a subsidiary of
Invesco PLC of London.
That product gives retail investors access to
private equity by tracking the Listed Private Equity Index, a benchmark of publicly traded companies that invest in
private equity.
“We think we can take a lot of the expertise we have in the market and identify pockets on the adviser side that don’t compete with the firms that we deal with,” Mr. Dillon said.
But why even take the risk?
ALPS thinks that it can add to revenue by entering the adviser market — revenue it can put back into the company, allowing it to invest in the technology it requires to provide back-office support to clients, Mr. Dillon said.
Given the pressure back-office providers are under to lower their costs, it isn’t a bad idea, Mr. Schneider said. Asset managers are always playing such providers off one another to get the lowest price on services, which has the effect of reducing revenue, he said.
It is too soon to judge whether ALPS’ foray into the advisory business will be a success, but it appears to be on the right track, industry experts said.
By launching portfolios of ETFs for annuities, ALPS has latched on to something that while not necessarily brand-new is still very attractive, said David Macchia, chief executive of Wealth2k Inc., a Hingham, Mass., strategic-marketing firm for annuities.
Because ETFs are generally cheaper than mutual funds, portfolios of ETFs tend to reduce the overall cost of variable annuities, while adding investment flexibility, he said.
Mr. Macchia said that’s one reason he is a big fan of the Curiangard Simplified Retirement Annuity, a variable annuity that invests in portfolios of ETFs. It is offered by Jackson National Life Insurance Co. of Lansing, Mich.
Such variable annuities are still the exception, Mr. Macchia said, but that may soon change.
The fact that ALPS recognizes that is a good sign, he said. “In terms of a new player, it’s always better to have your first offering wrapped in something innovative,” Mr. Macchia said.
