Powerful Wells Fargo division takes over firm’s wealth management research functions

Wells Fargo & Co. for the first time is building a single internal division responsible for acting as a gatekeeper overseeing the menu of investments used by advisers at the third-largest wealth management firm in the United States.
The new unit, Wells Fargo Investment Institute, combines research, investment strategy and alternative money management that had been spread across four units: Wells Fargo Advisors, Wells Fargo Private Bank, Abbot Downing and Institutional Retirement and Trust.
The firm’s Balkanized research activities are the legacy of the brokerage industry’s recent history of consolidation, including Wells’ 2008 acquisition of Wachovia Corp. and its A.G. Edwards & Sons Inc. subsidiary.
The institute includes, for the first time, a manager research team that serves all Wells wealth, brokerage and retirement units, including more than 15,000 advisers managing $1.6 trillion in client assets.
That team provides analysis of and make-or-break recommendations on investment products such as mutual and exchange-traded funds.
Nearly six in 10 wirehouse advisers put more than half of their clients’ money in funds recommended by home-office researchers such as the unit now housed in the institute; 30% of those advisers put nearly all client assets in those funds, according to a survey by the consulting firm kasina.
A number of the functions already have been transferred over to the new unit, and more will be transferred next year, including asset-allocation research. Leaders of the new group will be Darrell Cronk, who will serve and president and chief investment officer of the institute, and Greg Maddox, who is based in San Francisco but runs a manager research team with members in Hong Kong, London, and St. Louis, among other locations. Both men are veterans of the private bank.
In an interview with InvestmentNews, Mr. Maddox discussed the implications of the reorganization, the firm’s approach to fund selection, and the manager who took everyone by surprise in 2014, Bill Gross.
InvestmentNews: Why is Wells Fargo building a centralized unit for investment research?
Greg Maddox, head of global manager research: We were not able as a research firm to harness and utilize the fullest extent of our research team in a coordinated way for clients who looked similar. So the goal was to be able to find a way to get better specialization.
We took this opportunity to rationalize the coverage responsibilities for the team. The product types we cover now are mutual funds, ETPs (exchange-traded products), private placements, closed-end funds and separately managed accounts. So regardless of what the product wrapper is, this team specializes in having deep knowledge and understanding of the team that’s running the strategies and how that package influences what the strategy can and can’t do, as well as its costs.
Instead of having four different data requests and four different analysts covering their strategies, we’ve simplified the interaction we can have with managers by giving them one point of contact with the research team.
IN: A number of managers have taken issue with the length of the due-diligence process. Does it take too long, and is there a glut of products awaiting a verdict?
Mr. Maddox: For firms that have not invested in their research teams, that may be the case. But if the teams are appropriately staffed and have the appropriate technical infrastructure and willingness by management to fund onsite due-diligence trips, that isn’t a problem.
I don’t think we feel like the process is creating opportunity costs from some of these [market] inefficiencies being arbitraged before a manager can get out of diligence. We’re more of a long-term, patient investor, and if the decision is based on tactical trading and the window of opportunity is that short, that’s a different problem than what we’re trying to solve for. We’re looking for firms with sustainable edges.
The terminal value of a client is going to be based on many factors, including asset allocation, estate planning, strategic and tactical rebalancing, and thematic emphasis in portfolio construction. If you look at client account management more holistically than it really is, in a true sense, a probability system where you have to have great coordination and interaction of those disciplines in order to achieve superior results long-term.
IN: How do you measure your success?
Mr. Maddox: No. 1, a proven investment evaluation framework. No. 2, analysts that are experienced and trained in applying that framework. Access to hard-to-get investment opportunities. Global reach. And access to that opportunity set from technology infrastructure. You need to generate and parse through massive amounts of data. Because of our database capabilities, we can follow the career trajectory of someone who comes from an analyst team.
You need objectivity, independence and an unbiased view of what makes managers have a chance or a probability of outperforming their peers. It is a blend of qualitative and quantitative that generates the highest possibility of outperforming.
A lot of the industry’s standards have really risen to the level of excellence. Not all firms have. In that top tier, I think the standards for which the very best firms hold themselves are common.
What is not common is a firm’s access to these opportunities, who their employees are, so I think it is increasingly differentiated on the talent the fund can attract and retain.
It’s also the location of where those folks are at. Are they sitting in a stream of data that is not mainstream? If everybody’s in New York in one location there tends to be groupthink. If you can get data and insight from outside that corridor on the East Coast, I think that opens up possibility.
IN: Many advisers felt caught off guard by the turmoil at Pacific Investment Management Co. and the loss of Bill Gross. Did his departure present challenges for manager research?
Mr. Maddox: The Bill Gross thing did take a lot of the industry off guard. To the extent that the investment thesis is predicated on a star manager, I think it is incumbent on the due-diligence teams to understand what the succession plan and the key-man risk is in that team.
Wells Fargo thinks very highly of Bill Gross and we recognize that there was key-man risk. The bench strength that Pimco has put in place significantly mitigated a lot of that in some instances when the relationship among executives and firms becomes so contentious. Sometimes change is healthy change. My due-diligence teams have to parse through what the net effect of that transition is and certainly we need to know in advance what the key-man contingency management was.
In Pimco’s case, they have an all-star team waiting in the wings behind Bill Gross. The team that’s in place is a team that can deliver in their own right. We were sorry to see Bill go, but we were not overly concerned with the team that he left behind.
[A Pimco representative declined to comment.]
IN: What makes a great manager?
Mr. Maddox: Managers are generally going to stand out for one of three reasons or a combination of these reasons. They glean more insights from the same information that everyone else was looking at. They have access to better information or different information than everyone else. The third way is they move more quickly than others. They’re less encumbered and they can act on information faster than their peers. If one or more of those is present, there’s a great deal of interest on our behalf in figuring out if that edge is sustainable.

Related Topics: A.G. Edwards & Sons, Pacific Investment Management Company (Pimco), Wells Fargo & Co.