The BlackRock’s offices in New York.Craig Warga/Bloomberg
Amid the debate on the benefits of fee-based investment advice, the man who oversees more than $1-trillion in low-cost funds cautions that fighting the proliferation of this pay model is futile.
In a candid interview on the future of money management, Mark Wiedman, who oversees BlackRock's $1.2-trillion iShares exchange-traded fund business, argued that developed countries are in a race to the bottom on investment fees: "I see this everywhere in the West." Financial professionals who believe they will be able to run their businesses by continuing to take a portion of a 2-per-cent mutual fund fee are mistaken, he said.
Historically, Canadian retail investors compensated their investment advisers by paying them for buying and selling securities. Brokers have also earned embedded commissions, such as mutual-fund trailer fees, for investing client money in one company's products over a rival's.
Canadian regulators have signalled they are open to the idea of banning embedded commissions – and there is a chance they will eventually go so far as to follow the United Kingdom and Australia and ban commissions of all stripes. If so, financial advisers would need to make money by charging a flat fee, often around 1 per cent, of the assets under their watch.
Opponents of such a dramatic overhaul say that it would force the industry to adopt a model whose merits have yet to be proven. (Britain and Australia only implemented their bans in 2012 and the benefits are still being studied.) Mr. Wiedman argues anyone dragging their feet because of this will struggle.
"My business is going to grow," he said, adding that his ETF that tracks the S&P/TSX composite index charges only six basis points, or 0.06 per cent. "But the industry's got a tough five years ahead."
Some countries have instituted outright bans, while others, such as Canada, pitch full fee disclosure as an alternative to outlawing commissions altogether.
"Awkward conversations are as bad as a ban for any adviser," he said, noting that advisers hate having to justify how much they make. Eventually, they grow tired of having to defend themselves, so they decide to move to a straightforward fee-based system.
In a world in which 10-year Canadian government bonds yield roughly 1 per cent, it is nearly impossible for mutual-fund companies to charge two percentage points each year, and then pay the adviser half of that.
"How do you hand over a statement with all of the retrocessions you've received?" he asked of brokers who advise high-net-worth clients.
As brokers get squeezed, Mr. Wiedman argues that it's only going to get tougher for asset-management companies to make money. "I was in Zurich recently with one of the big banks," he noted. "They're saying to me, 'I'm going to squeeze you first. You see: We were partners before, when we shared in [fees]. We're not partners any more.'"
In this new era, asset-manager size matters more than ever. "This is a scale business," he said, noting that when you're only earning six basis points on a fund, you must sell loads of it to earn a decent return.
Because scale matters so much, ETFs are inherently well suited to thrive because they charge lower fees – which is why there has been an explosion of ETF providers in Canada in the past year.
But as the number of providers grows, the products they offer are evolving. New "active" ETFs attempt to use a fund manager's investing prowess to pick a selection of stocks or bonds that deliver better returns than passive index strategies.
Mr. Wiedman is somewhat skeptical of such strategies because it is hard to consistently deliver outsized returns. BlackRock itself is focused on ETFs developed around "factors" such as volatility or momentum. An investor might buy one of these funds because they want steady, stable returns – so, low volatility – regardless of what happens in the broad market.
Despite this advantage, BlackRock and other established asset managers will need to keep pace with emerging robo-, or digital-only, advisers. At the moment, the assumption is that veteran wealth-management companies are under threat from these startups. Mr. Wiedman is willing to bet the old guard finds a way to compete.
"There are four things that are necessary to succeed as a robo," he argues. "Brand. Scale. Capital. And then technological ability."
"Long term, I'm betting with big, branded organizations because they'll figure it out – or at least some of them will."
He draws an analogy: "Remember online banking was big in the late nineties, and in the U.S. and the U.K. there were online banks that were going to destroy the world? Wrong! They're all gone."
Tim Kiladze