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Steve Cook on Impact of DOL Rule (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to Taking Stock with on Bluebird Radio. New rules, No,
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  Speaker 1: not new rules from Bill Moore, a new rules from
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  Speaker 1: the Department of Labor that could affect not only your investments,
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  Speaker 1: but your relationship with your investment adviser. Here to tell
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  Speaker 1: us more Stephen Cook, Managing director and business executive for
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  Speaker 1: Structured Products Services for B n Y Melon Asset Servicing,
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  Speaker 1: and he's joining us live from the E t F
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  Speaker 1: Exchange Program. It's a B and Y Melons et F
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  Speaker 1: symposium in Data Point, California. Stephen Cook, thank you very
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  Speaker 1: much for being here. Thanks for having me. It's great
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  Speaker 1: to be back. All right, So just define what are
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  Speaker 1: the new rules from the Department of Labor and how
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  Speaker 1: do you think that they are going to affect the
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  Speaker 1: role of exchange traded funds in the portfolios. Well, the
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  Speaker 1: d o LL conflict of interest rules are basically setting
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  Speaker 1: forth a platform or guidance that states that in advisor
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  Speaker 1: who's advising a client on retirement assets for one K
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  Speaker 1: assets are required to put the interest of the investor
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  Speaker 1: the client first. Uh. And so the thought is that
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  Speaker 1: traditional broker dealers who may have in the past um
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  Speaker 1: made decisions and other factors are really going to be
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  Speaker 1: required in everything they do to put the client interests first,
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  Speaker 1: and so it's going to force them to look at
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  Speaker 1: things differently. Fees that clients pay for their exposure UM,
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  Speaker 1: how they go about gaining certain exposures in an asset
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  Speaker 1: allocation model, and the appropriateness for that client to be
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  Speaker 1: in specific products, and so the structure of et s
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  Speaker 1: because they tend to be low cost, because they're transparent
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  Speaker 1: and everybody understands clearly what they own, are really going
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  Speaker 1: to benefit from these new rules as they've been written.
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  Speaker 1: That's very interesting. Um So, who will benefit most from that? Well,
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  Speaker 1: I think a number of individuals. First. Obviously investor hopefully
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  Speaker 1: will benefit UM you and I as we invest in
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  Speaker 1: our foreign K platform, but certainly the t F issuers
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  Speaker 1: are going to benefit that long term in terms of
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  Speaker 1: drawing assets. We did a study with approximately a hundred
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  Speaker 1: and seventy investment advisors and what came back is that
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  Speaker 1: the large percentage of those investment advisors are going to
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  Speaker 1: start recommending at a much higher percentage e T s
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  Speaker 1: to be a larger UH investment for their clients than
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  Speaker 1: other potential products that's in the past. So For instance,
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  Speaker 1: if an advisor had had twenty three percent of clients
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  Speaker 1: assets and e tps in the past, moving forward, they're
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  Speaker 1: going to look to increase at allocation to so increase
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  Speaker 1: and net new assets flowing into e t f s
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  Speaker 1: over what you've seen previously. Why would that happen? Is
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  Speaker 1: it because uh, E t f s are perceived as
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  Speaker 1: being less risky. I mean they there's no real sort
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  Speaker 1: of definition of well, they're less sky, they're more risky.
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  Speaker 1: I mean, it really depends on what you've selected. And
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  Speaker 1: if that's the case, is it that money managers and
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  Speaker 1: asked that allocators they're going to just go with what
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  Speaker 1: they believe to be safe because number one, they don't
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  Speaker 1: want to be suited and number two, they don't want
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  Speaker 1: to be put out of business by the Department of Labor.
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  Speaker 1: It's not necessarily about safety. It's about utilizing the best
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  Speaker 1: building blocks for an esset allocation model. And in the
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  Speaker 1: past many have thought that might be actively managed funds.
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  Speaker 1: They're trying to beat the market, they're trying to have
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  Speaker 1: their clients overall performance outperformed what they could get from
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  Speaker 1: the index fund. But I think if you look historically,
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  Speaker 1: we've seen trends that managers are not able to outperform markets,
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  Speaker 1: and you're paying quite a bit for that management. So
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  Speaker 1: if you have an actively managed mutual fund, they might
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  Speaker 1: be charging a hundred and twenty basis points or a
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  Speaker 1: hundred and fifty basis points. If you can get an
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  Speaker 1: e t F that tracks an index that actually outperforms
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  Speaker 1: those actively managed funds and does so at a cost
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  Speaker 1: of seven to eight to nine basis points, you're talking
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  Speaker 1: a huge opposite. But in Jack Bogle we're here, you know,
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  Speaker 1: legendary founder ban Card, he'd say, so why just buy
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  Speaker 1: an index fund? Why do you need to get an
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  Speaker 1: e t F. Certainly some optionality exists there, but I
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  Speaker 1: think if you look at the e t F s uh,
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  Speaker 1: they're much more tax efficient. Doesn't necessarily always help in
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  Speaker 1: a tax advantage asset class like an r RA A
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  Speaker 1: or four one K, but the ability to draw assets,
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  Speaker 1: have them exist alongside taxable investments and non taxable investments
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  Speaker 1: and get the benefits of the structural efficiencies that exists
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  Speaker 1: in e t F. It's just cheaper to put in
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  Speaker 1: E t F together than as a mutual fund. It's
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  Speaker 1: cheaper to have one ongoing operated and so the cost
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  Speaker 1: efficiency associated with that, along with the tax efficiency really
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  Speaker 1: puts investors in advantage in a long term and allows
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  Speaker 1: advisors to really benefit or adhere to the d o
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  Speaker 1: L rules and the spirit of them and really give
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  Speaker 1: their clients the best access. In another area, if you look,
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  Speaker 1: the structure allows itself to be include of commodities of
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  Speaker 1: other asset classes that may not be as correlated to
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  Speaker 1: the overall market, and because it naturally fits with those
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  Speaker 1: types of asset classes, it gives advisors a lot more
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  Speaker 1: in the way of choice as to how to go
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  Speaker 1: ahead and manage their client's portfolios. Just last point, If
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  Speaker 1: that's the case, does that not mean that the registered
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  Speaker 1: rep or the money manager is going to have an
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  Speaker 1: even more challenging time because now you've opened up the
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  Speaker 1: menu to include all these different types of ETFs, they
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  Speaker 1: are going to have a more challenging time. And it's
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  Speaker 1: really gonna be on the issuers of e T S
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  Speaker 1: and the industry at large, folks like bny Mellen to
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  Speaker 1: help the marketplace, to help advisors understand these products and
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  Speaker 1: to help them help adopt them into their client's portfolio.
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  Speaker 1: So you're going to have to see the need for
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  Speaker 1: issuers for the et F industry to really educate, not
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  Speaker 1: just for folks who have already been buying E t
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  Speaker 1: F for the last ten years, but really the new
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  Speaker 1: folks who are gonna have to adopt them as a
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  Speaker 1: part of this d O L standards. So you are
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  Speaker 1: going to see the need for a lot more education,
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  Speaker 1: a lot more understanding in the marketplace. Alright, Well, understanding
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  Speaker 1: the marketplace always useful. Steve Cook, thanks for joining us.
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  Speaker 1: Thanks for having me, folks, it was great to be here.
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  Speaker 1: He's managing director and business executive for Structure Product Services
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  Speaker 1: being White Melton Asset Servicing, and we've had a terrific
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  Speaker 1: time today at et F Exchange sixteen Ideas Innovation Interaction
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  Speaker 1: being Why Melton's annual conference here in Dana Point, California.
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  Speaker 1: I'm Kathleen Hayes along with Pim Fox, and this is Boomberg.