Debashis Chowdhury, CFA with OCBJ's Michael de los Reyes on the U.S. Department of Labor’s new fiduciary rule and clients’ recent moves toward indexed investments and robo advisers.
We view the fiduciary rule as a positive for investors large and small. Many advisers were already working this way with clients, and this cements and codifies the good things the industry was doing. It’s a confirmation of what we have always thought was the right way to interact with clients: putting their best interests first. Canterbury’s independence has always allowed us to be objective—and provide conflict-free advice—when doing manager research and making investment recommendations to our clients.
The rule will really impact smaller investment accounts. Therefore, the investment advisory industry needs to determine how best to provide the services to those accounts. Robo advisers can supplement and provide quality service to a group of investors who would otherwise be without counsel. We view that as a positive because more people will have access to investment services.
However, we believe robo advisers will never replace human connection, interaction and custom-tailored investment solutions with each client’s specific objectives and constraints in mind—the very foundation of sound financial advice. For nonprofit endowments, foundations, wealthy families and family offices, for example, objectives and strategies are increasingly too complex and specific for the robo adviser service model.
Robo advisers tend to work best for passively managed funds, a recent trend we’ve seen increasing. We differ in that we believe there’s a place for both active and passively managed funds in many client portfolios.
Each client is unique, with different goals and objectives. So, too, is their use of active or passive strategies. Some fee-sensitive clients use passive investing to decrease their investment costs. Others use passive investing only in the most efficient asset class, such as U.S. large-cap equities. Those trying to optimize after-tax wealth use a passively managed strategy to harvest losses. Some use a full suite of active managers to leverage the skills and expertise of professional investors.
We help our clients identify their objectives and create a portfolio using active, passive, or a combination of both that puts them in the best position to achieve their specific goals.
Another thought on the passive trend is to take a cautionary tone. For example, we have seen a lot of retail money be moved due to underperformance with active managers. But it is critical to view results over a full market cycle and not fall prey to short-term market volatility or short-term trends.