Wells Fargo expanding bond fund and ETF use in SMAs

Wells Fargo Advisors has for the first time expanded the menu its home office uses to create some portfolios to include bond funds and ETFs.
Fixed-income separately managed accounts in the Compass Advisory Program previously only invested in individual securities, including bonds. But now managers have the flexibility to use mutual funds and exchange-traded products, which are often more easily traded, or liquid, than the bonds they track.
The move, which company officials attribute to convenience, comes amid a continuing evolution by broker-dealers to rely more heavily on selling products like funds rather than selling individual bonds.
“We’ve got that dueling thing where the traditional bond markets are getting thin and at the same time, bond ETFs are seeing a surge in liquidity,” said Dave Nadig, chief investment officer at ETF.com, an investment-research service. “That’s definitely what we’re hearing from advisers.”
Mutual funds and ETFs accounted for 52.4% of managed account assets in 2013, up from 41.7% in 2008, according to Cerulli Associates, an asset-management data firm. Individual securities — like stocks and bonds — dropped by a little bit less than a percentage point over the same five-year period.
At the same time, in fixed-income markets, bond funds and ETFs have grown massively in scale as broker-dealers have traded fewer individual bonds. Funds held nearly $3.7 trillion in bonds in 2013, a 107% increase from 2008, according to the Investment Company Institute, a trade group of money managers. Broker-dealers pared back their individual bond inventories by about 87% between Oct. 2007 and July 2014, according to the Federal Reserve Bank of New York.
Compass has been offered through Wells Fargo’s more than 15,000 brokers, including those it employs, independent affiliates at the Wells Fargo Advisors Financial Network and through broker-dealers who are clients of Wells-owned First Clearing, according to a set of regulatory disclosures reviewed by InvestmentNews.
The portfolios are managed by the Wells Fargo Advisors home office, namely a nucleus of investment advisers known as the Advisory Services Group.
The assets are in “wrap” accounts — known by that term because fees for a range of services are wrapped together in one, all-in price, in this case a negotiable rate of 1.5% annually, or less, depending on the amount of assets invested.
All told, Wells Fargo claimed $409 billion in managed account assets as of June 30, according to a company earnings presentation.
Wells made the bond portfolio changes earlier this year, and disclosed them in a brochure filed with regulators last month.
Allison E. Bruns, a spokeswoman for Wells Fargo Advisors, based in St. Louis, Mo., said doing so would align the fixed-income program with other managed-account offerings.