PANC 2010: Moving Beyond Mutual Funds

The discussion opened with the question, “How can we [financial advisers] make ourselves stand out?”  The answer given by the panelists was by using ETFs and collective trusts. The next logical question was then, “How are they similar and different from mutual funds, and how can we implement them in our plans?”

Greg Porteous, Director of iShares 401(k) Sales at BlackRock, got the conversation started by saying ETFs and collective trusts can be implemented in any plan segment.  ETFs have no minimums or maximums, but collective trusts usually do have minimums, generally ranging from $50 to $100 million.   

Reno Regalbuto, Vice President Sales at TD Ameritrade Trust Company, said that his firm sponsors approximately 70 collective investment funds, each of which has a registered investment adviser (RIA) as a sub-adviser.ETFs can be held in any plan since they are a registered product.  Regalbuto said that he sees most of the growth for ETFs in the small plan arena.

At which point, the panelists asked the approximately 50 financial advisers in the audience who was already using ETFs or collective trusts in their plans.  Only one or two people said they were using ETFs and about ten were using collective trusts. The moderator of the panel, John Mott, Senior Vice President – Investments, Corporate Client Group Director, Morgan Stanley Smith Barney, asked one of the people using ETFs why they chose to do so.

The adviser in the audience said he uses them in several small accounts and that he manages them as an asset allocation.  He said he appreciates ETFs’ purity of style and said that he is able to differentiate himself from competitors.   

Mott then asked an adviser who said she uses collective trusts why she chooses to do so.  She said collective trusts can be “critical” to some of the larger plans because of the flexibility. She also said that one can be specific to a plan or it can be used in multiple plans.

Dana Hartwell, the third panelist and a Senior Vice President at Natixis Global Associates, said that collective trusts are operationally just like mutual funds; they trade the same way.  But with a collective trust, there are fewer fees and no 12b-1 option.

Porteous highlighted more differences between ETFs and mutual funds; the one similarity being that they have the same level of diversification.  ETFs are traded on an exchange, versus the trading floor. He said that you can have more transparency with ETFs, since the holdings are published every night; this can help build style purity.

Having a better understanding of the basic differences between the types of funds, the panelists moved onto how an adviser would handle them operationally.

Regalbuto pointed out that ETFs have several barriers to their usage in 401(k) plans. Not long ago, ETFs could only be held in a unified managed account (UMA).  But with creativity, he said, custodians have been able to trade them. His company has been enabling record keepers to trade ETFs in fractional shares rather than in full shares.   

Porteous expanded on these ideas: “Two years ago, I would say there were major hurdles; how do you control costs, how do you fractionalize, but as of May of last year, the custodians got involved and said we can do t+1 transfers, we can fractionalize and we can do it cost effectively. Morningstar said you can’t, but now we can.”

Hartwell also pointed out the operational difference of needing to go to plan sponsor and get them to sign on when using collective trusts.He said that sometimes size can be a problem because of minimum asset requirements. If the plan is below $50 million, he recommends sticking to mutual funds.    

Mott then asked the panel to elaborate on how advisers should go about educating plan sponsors and participants.  Hartwell said it’s still a work in progress, recognizing that it can seem complicated at first.  He recommends sticking to one-page handouts in the beginning and focusing on the lower fees.  Porteous added that he uses ETF transparency and flexibility as selling points as well.   

As the panel was winding down, Mott asked the panelists how they see advisers balancing ETFs, collective trusts, and mutual funds.  Porteous answered by saying it’s not an “either-or decision – it’s completely open architecture - you can use all to differentiate yourself in the market place.”