Active Management: Skill versus Luck

This is a summary of a panel discussion from the MMI 2013 Spring Convention held in NYC on April 22-24.

John Thompson, Partner, Head of Investment Solutions, Hewitt EnnisKnupp

Ed Foley, Director, Dimensional Fund Advisors
Brian Hansen, President & COO, Confluence Investment Management
Robert G. Smith, President & CIO, Sage Advisory Services

According to the Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard:

The year 2012 marked the return of the double digit gains across all the domestic and global equity benchmark indices. The gains passive indices made did not, however, translate into active management, as most active managers in all categories except large-cap growth and real estate funds underperformed their respective benchmarks in 2012. Performance lagged behind the benchmark indices for 63.25% of large-cap funds, 80.45% of mid-cap funds and 66.5% of small cap funds.

Performance returns over the past five years clearly show that active management has had a tough time, Smith opined.  While many more fixed income managers beat their indices, equity managers tend to do better during rising markets.  Maybe equity managers could take after fixed income and do more sector rotation, he pondered.04-11-13-Failure-of-Active-Management-Equity

According to Hansen, there is a lot of “closet” benchmarking going on.  These managers are going to have a harder time trying to outperform over time.  Confluence believes that it’s better to do research and locate undervalued stocks for long-term payouts than to try and mirror the index.  They do have an ETF strategy group that exclusively uses passive benchmarks, he noted.

DFA maintains a blend between active and passive management, Foley explained.  Research shows that performance from active management is driven by a mixture of skill and luck.  The question is, how do you separate the skilled managers from the ones who were just lucky?  Also, can you structure portfolios around reliable premiums, he asked?

What are some long-term investment aspects that your firm is focusing on?

Sage offers three broad investment strategies; active fixed income, structured products, and tactical asset allocation using ETFs, Smith reported.  He believes that the hot button strategies going forward will most likely be global tactical active allocation, multi-asset income, and fixed income strategies that take advantage of ETFs on an opportunistic basis.  They avoid buy and hold strategies, which failed in 2008 when the financial crisis effectively changed “core plus into core minus”, he joked.

DFA started in 1981 and have always had close ties with the University of Chicago, Foley explained.  Their philosophy on building portfolios is encompassed in three principles; 1) Markets reflect all information available to buyers and sellers, 2) portfolio structure determines performance and provides significant contribution to how performance is generated; and 3) diversification, he said. Continue reading

Why Haven’t Advisors Embraced Unified Managed Accounts?

This is an overview of a session from the MMI 2012 Tech & Ops Conference held in Jersey City, NJ.


  • Jay Link, Managing Director, Managed Solutions Group, Merrill Lynch


  • Andrew Clipper, Managing Director, Head of Wealth Management Services, NA, Citi
  • John Capelli, Managing Director, COO, Managed Account Advisors, Merrill Lynch
  • Rob Klapprodt, President and Co-Founder, Vestmark

Are UMA/UMH and Rep as PM essentially the same thing?

While there are similarities between the Merrill UMA and Rep as PM programs as far as the end investor is concerned there are important differences, Capelli emphasized. UMA’s can include investment management delivered strategies, for example. Also, while Rep as PM can use mutual funds and ETFs to provide exposure to lower correlation asset classes, such as emerging markets, a UMA can deliver them at a lower cost using individual securities, he said.

If the goal is to create a portfolio across all of an investor’s assets, those assets are usually spread out across numerous legal entities and accounts, Clipper observed. The UMA/UMH structure is the best delivery mechanism for a holistic approach. On the OpenWealth platform, they separate out portfolio administration (i.e. rebalancing, asset location, cash management) from the intellectual property (i.e. the models). The portfolio administration is all handled in a central location, while the intellectual property can be added anywhere along the value chain, he said.

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The Wizards of ETFs – Behind the Curtain (2/2)

This is a review of a session from the Money Management Institute’s 2012 Fall Solution Conference.  This is part two of a two-part series.  You can read part one here.


  • Benjamin T. Fulton, Managing Director of Global ETFs, Invesco Powershares Capital Management, LLC


  • Sam Turner, Director of Large Cap Portfolio Management at Riverfront Investment Group
  • Jill Iacono Mavro, Managing Director, Head of National Accounts, State Street Global Advisors – $337 billion in ETF assets globally, 94% in US, SPY launched in 1993
  • Dodd Kittsley, Senior Product Manager & Head of ETP Research, iShares

How much weight should advisors put on liquidity when evaluating an ETF?

There are two levels of liquidity: primary and secondary markets, Mavro said. On the primary market, an ETF is as liquid as the underlying index that it tracks. It depends on how easy is it for authorized market participants to trade the basket of securities that represent the index. On the secondary market, liquidity is defined by how often the ETF is traded. The more it is traded, the thinner the spread between the bid and ask prices. Advisors should look at both levels together, not just one or the other.

Turner disagreed and stated that primary market liquidity and fees are the two worst reasons to select ETFs.  Riverfront focuses primarily on exposure and have never had an issue getting out of an ETF due to lack of primary market liquidity, he said.

Secondary market liquidity can become an issue when investing ETFs according to Michael Jones, also from Riverfront Investments, who was in the audience.  He provided an example where Riverfront was the seed investor for an international ETF that was currency-hedged (The ETF happened to be DBX MSCI EAFE Hedged Equity Fund, symbol: DBEF). Primary market liquidity wasn’t a problem for them since they were working directly with the authorized participant and had great execution.  However the use of the currency hedge became more and more expensive to the point where they had to pull their investment due to the high marginal trading costs of bringing on each additional client, he said.

Should You Avoid ETFs with Low AUM?
An article in Barrons makes the case that low AUM is not a good liquidity indicator for ETFs:
“…asset levels aren’t always the best proxy for liquidity. Unlike a stock, an ETF can still have strong liquidity even if its trading volume is low or its assets are tiny. That’s because the underlying stocks’ or bonds’ liquidity is usually the best way to measure an ETF’s real ease of trading. Barron’s asked market-making firm Knight Capital to rate the liquidity of 30 small ETFs whose 2012 returns are about double those of the S&P 500 as of early November. If you judge ETF tradability by the way its components trade, as Knight does, you’ll find lots of low-asset ETFs with more-than-expected liquidity. “I wouldn’t shy away from ETFs that have low volume or low assets. You just have to be smart about how you trade it,” says Eric Lichtenstein, managing director of Knight’s ETF trading desk.”

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The Wizards of ETFs – Behind the Curtain (1/2)

This is a summary of a session from the Money Management Institute’s 2012 Fall Solution Conference entitled ETFs: To Develop or Not Develop?  This is part one of a two-part series.  You can jump to part two by clicking here.


  • Benjamin T. Fulton, Managing Director of Global ETFs, Invesco Powershares Capital Management, LLC


  • Sam Turner, Director of Large Cap Portfolio Management at Riverfront Investment Group
  • Jill Iacono Mavro, Managing Director, Head of National Accounts, State Street Global Advisors – $337 billion in ETF assets globally, 94% in US, SPY launched in 1993
  • Dodd Kittsley, Senior Product Manager & Head of ETP Research, iShares

How has the trend of advisors shifting towards Rep as Portfolio Manager (RPM) changed your business model?

Turner believes RPM is more of a challenge than a threat since it is the end client experience that matters. Competition from RPM raises the bar, with each crisis causing a shakeout of weaker products and players. The next crisis may not be a market downturn but could be a repeat of 2009 when many government central banks were trying to stimulate their economies through quantitative easing, he said.

Many of the advisors who Turner has spoken to are over-weighted in cash because their client’s are nervous. If the market continues its current upswing into 2013, then this lack of participation could be a risk for these advisors, he warned. Their clients may fire them because they were too cautious.

RPM has also been a huge growth engine outside the US, Kittsley stated. Financial transparency rules enacted in the UK will be a huge catalyst for growth in that market. ETFs are well-suited for managed books of business.

StateStreet’s distribution efforts started in the RIA segment, Mavro explained. They treat it more like an institutional service model. iShares and PowerShares have been focusing on RPM for many years and it has become a differentiator for them on larger platforms Regulatory reform targeting advisors running discretionary portfolios often result in more outsourcing, which benefits firms like Riverfront, she claimed.

Related WM Today Posts
Has Rep as PM Growth Peaked?
Rep as PM: The Inside Scoop

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Has Rep as PM Growth Peaked? (2/2)

This is a summary of a panel discussion from the Money Management Institute’s 2012 Spring conference held in Chicago, IL.  This is part 2 of 2.  You can read Part 1 here.

Moderator: Jay Link, Managing Director, Merrill Lynch

Lorna Sabia, Managing Director, Head of Managed Solutions Group, Merrill Lynch
James Walker, Head of Consulting Group, Morgan Stanley Smith Barney
Matthew Witkos, President, Eaton Vance Distributors.  Chairman of MMI.

Is your firm coming out with any new product offerings?

According to Witkos, Eaton Vance has developed a new product that they are calling Exchange Traded Managed Funds.  It is like an ETF since it trades like a stock, except without the transparency of an ETF so that the money manager’s intellectual property is protected.

What is the sponsor perspective on mutual fund velocity?  

No one wants advisors over-trading mutual funds, Walker commented.  Firms look at trade velocity and try to keep it within a certain range, he said.  The industry should be more aware of the difference between selling mutual funds individually versus fitting them into a larger portfolio.  Walker thinks that market velocity won’t be going away any time soon.
Sabia feels that velocity is a complex topic and more data is needed to determine the impact that it might have on a portfolio.  She also stated that she believes that sponsors, advisors and managers all “own” the issue of velocity and everyone should work together to deal with it.

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Has Rep as PM Growth Peaked? (1/2)

This is a summary of a panel discussion from the Money Management Institute’s 2012 Spring conference held in Chicago, IL.  This is part 1 of 2.  You can read part 2 of 2 here.

Moderator: Jay Link, Managing Director, Merrill Lynch

Lorna Sabbia, Managing Director, Head of Managed Solutions Group, Merrill Lynch
James Walker, Head of Consulting Group, Morgan Stanley Smith Barney
Matthew Witkos, President, Eaton Vance Distributors.  Chairman of MMI.
Has the growth of RPM programs peaked?  According to Dover Research, five years ago, there was $1.2 trillion of client assets in managed solutions and RPM/RAA combined were less than 30% of that total.  Today, total managed assets have grown to $2.4 trillion while rep-driven programs have increased their share to 40% or almost $1 trillion.

How important is RPM to your firm?

RPM is Morgan Stanley’s fastest growing program, Walker reported, with $560 bil in all advisory programs, $150 bil in RPM globally.  Major change in past few year has been change from individual equities (now 34%) to include ETFs, mutual funds, etc.  This is a great solution for Reps that consider themselves to be active allocators.  Trend: move towards discretion, driven by FAs practice management, customers want outcome based investing.  From a regulatory sense, it’s easier to deliver on fiduciary duty.
Sabbia joined the Managed Solutions Group seven months ago.  At Merrill, RPM is called the Personal Investment Advisory (PIA) program and was launched in 1996, now $105 bil AUM.  Approximately 4,500 FAs leverage the program and they’re segmented into three buckets: it’s their fastest growing segment with a $15.7 bil net increase last year and they’re on track to beat that number this year, she said.

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Rep as PM: The Inside Scoop – Part 2

This post is a summary of a session from the MMI 2011 Fall Solutions Conference that was held in NYC. It is part 2 of a 2 part series. Click here to read Part 1.

Marc Zeitoun, Managing Director, Head of Distribution, Rydex/SGI

Jay Link,
Managing Director, Managed Solutions Group, Merrill Lynch
Peter Malafronte,
Executive Director, Managed Accounts, UBS
George Raffa, National Sales Manager, Asset Management Division, SVP, Raymond James

I felt that this was one of the most useful sessions at MMI because the panelists all shared lots of information about their firm’s advisory business, including statistics (my favorite) and details about the inner workings of their programs. Also, the moderator did an excellent job moving things along and asked insightful follow-up questions, which gave the panelists a chance to elaborate on some key concepts and helped make the session more interesting.

How do Rep as PM and Rep as Advisor programs work together?

Peter agreed that the two platforms are complimentary and the decision as to which to choose is mainly a client preference issue. It depends on whether or not they want to be involved in the decision making process, he said.

Also, Rep as Advisor is sometimes considered to be a “farm league” for RPM clients, Peter joked. Once a client has worked with an advisor in a non-discretionary program, has developed trust and understands how the advisor thinks about investments, portfolio construction and managing risk, that client is more likely to feel comfortable moving into a Rep as PM program, he asserted.

Marc added that the conventional wisdom says that RPM assets are the stickiest and least litigious. Additionally, they have higher levels of client satisfaction.

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Diversify, Diversify, Diversify – 3 Ways to Help Advisory Products Succeed in Volatile Markets

“How can clients improve diversification in their portfolios?” was the question Roger Paradiso posed to those attending this session at the MMI Tech and Ops Conference 2011.  Client’s portfolios aren’t performing as expected and their needs aren’t being met, he said, they are looking for solutions. The recent rise in volatility in the market, he explained, combined with the correlation of many previously uncorrelated asset classes, has increased the priority of diversification for many investors.


Roger Paradiso, President and Chief Investment Officer, Private Portfolio Group, Morgan Stanley Smith Barney


Mark Thomas, Senior VP, Head of Managed Accounts, PIMCO
Joe Mrak, CEO, FolioDynamix
Donna Davis, Director of Trade Management, Private Portfolio Group, Morgan Stanley Smith Barney

Alternative investments help to diversify portfolios. How are you introducing alternatives into advisory solutions?

PIMCO uses a forward-looking process when designing client solutions, Mark explained. They evaluate what vehicle, product or platform makes sense and decide on the right structure for each client. Support for 40Act funds, limited partnerships, private funds, and separate accounts are all included in their program.

One issue when introducing new products is ensuring that there is enough capacity, Mark said. PIMCO is continually looking for ways to lower the minimums in their alternative structures and vehicles to make them available to a wider audience.

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Rep as PM: The Inside Scoop – Part 1

This post is a summary of a session from the MMI 2011 Fall Solutions Conference that was held in NYC last month.  It is part 1 of a 2 part series.  You can read part 2 by clicking here.

Marc Zeitoun, Managing Director, Head of Distribution, Rydex/SGI

Jay Link,
 Managing Director, Managed Solutions Group, Merrill Lynch
Peter Malafronte, 
Executive Director, Managed Accounts, UBS
George Raffa, National Sales Manager, Asset Management Division, SVP, Raymond James

I felt that this was one of the most useful sessions at MMI this year because the panelists all shared lots of information about their firm’s advisory business, including statistics (my favorite) and details about the inner workings of their programs.   Also, the moderator did an excellent job moving things along and asked insightful follow-up questions, which gave the panelists a chance to elaborate on some key concepts and helped make the session more interesting. — Craig

Rep as PM (RPM) and Rep as Advisor (RAA) are the fastest growing fee-based programs in the industry, increasing assets 40% annually over the past three years.  Any asset management firm that doesn’t have a strategy to address RPM is missing the boat.

Which term is more accurate, Rep as PM or Rep as Advisor?

Jay believes that the term Rep as Advisor makes more sense since advisors do quite a bit more than just portfolio management.  They act in some ways as both investment consultants and wealth managers.  This is an entrepreneurial community and some RPM advisors consider themselves to be style-specific and market themselves as money managers.  Other advisors see RPM as just another level of service that provides a better overall client experience.  They use discretion as a tool to deliver more holistic advice.

Peter really doesn’t like the RPM title, since advisors are acting in an investment advisory capacity. Rep as PM doesn’t adequately capture what the advisor is doing for the client. Planning, liability side of the balance sheet, trusted council. RAA is more accurate.

George feels that RPM works best for teams that are headed by a financial planner with one person that oversees the portfolios and spends 100% of their time on it.

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Managed Accounts: Future Trends, Projections and Opportunities

This post is a summary from a panel session at the Financial Research Associates 9th Annual Managed Accounts Summit in Boston, MA.

Moderator: Phil Masterson, Managing Director, Investment Manager Services Division, SEI.

Panelists: Andrew Clipper, Managing Director, Citi Investor Services, Tracy Gallman, SVP, Investment Products & Platform Development, LPL Financial, Paul Oliu, Director of Business Solution Strategy, Fiserv Investment Services, Jeff Strange, VP, Strategic Planning, Cole Capital, Russell W. Tipper, Director, Managed Solutions Group, Merrill Lynch Global Wealth Management, and Chris Wager, DMA Product Manager, Advisory Products Group, Wells Fargo Advisors.

Where are the assets flowing from the standpoint of the managed accounts solutions segment?

We’ve seen a return to outstanding flows for the advisory industry as a whole, with approximately $50-$70 billion of net inflows per quarter across different managed account programs, according to Jeff. We’re almost at the point where we have more assets than before the financial crisis. Separate account programs has been the exception to this, since we’ve just recently started to see net flows turn positive and those are really just going into dual contract programs, he said.

Most of the focus of the industry has been rep-driven programs, which have been pulling in around $20 billion per quarter, Jeff reported. We’ve seen a little bit of a turn towards SMA flows. New sales and asset growth in UMA has been around 35%, while SMAs have been growing at around 2%.

The growth in traditional SMA’s has been more in international equities and municipal bonds, while UMA programs are still mainly concentrated in large cap equities and doesn’t have critical mass to diversify into too many styles, he said.

Similar trends are occurring in Citi’s managed account programs, Andrew reported. They’re seeing large movement into SMA space, less into UMA, with a tremendous movement into dual contract programs and away from single contract programs. On the sponsor/distributor side, they’re seeing growth of over 3,000% into the UMH space.

Where do you think flows will be going from the solution segment perspective as well as the asset cost perspective?

According to Russ, the easy money says that client-directed and RPM are where the flows are going to be. But in this market environment, they’ve been seeing more traditional nine box, asset allocation-driven investments within SMA and UMA.

Merrill’s clients aren’t asking for relative performance anymore, they’re looking for absolute performance due to market volatility, Russ asserted. RPM has more flexibility to look towards absolute performance products, however, over the longer run, we’ll see a return towards more active management outperforming more traditional asset allocation, he believes.

While RPM is the fastest growing product type, there are serious scalability issues with RPM as well as client-directed programs, which have a growing base but absolutely no scalability. Client-directed is largest advisor program at Wells Fargo, but scalability is a real concern, according to Chris.

At LPL Financial, they’re starting to see an increase in the use of ETFs through separate account managers, Tracy announced. This brings more of a tactical approach and provides the ability to go to cash or move into different sectors. Individual equity positions are being replaced with ETFs, which is a trend that’s going to continue, with mutual funds possibly being used more as core with ETFs as satellite, she said.

Could you define UMH and contrast it with UMA from the perspective of an investor, manager and sponsor?

A UMA is an account that is typically invested only in equities, ETFs and mutual funds and is rebalanced by an overlay manager, Andrew suggested. It exists as a separate, siloed product from wrap mutual funds, RPM, RAA, SMA, he added.

UMH is more of a delivery mechanism for the investor, Andrew continued, and allows for the elimination of product silos so that the investor can have a holistic rebalancing across all security types across all of their accounts. Citi has being running UMH in production since 2009, he claimed.

Andrew explained that there are three key components to a UMH: Household-level rebalancing and performance, asset aggregation across multiple books and records platforms and tax and cash flow optimization.

A typical independent financial advisor might have accounts at three or four correspondent clearing firms and broker-dealers and the last thing an advisor wants to do is to tell their client that they have to do is move their accounts and repaper them, Andrew commented.

The ability to aggregate assets across multiple brokerage firms requires a tremendous amount of connectivity, he asserted. More than simple aggregation tools like Yodlee, but actual electronic connectivity to the financial institutions.

But it’s more than just reporting, Andrew warned. You must be able to selectively aggregate at the portfolio level, which could be multiple accounts, but not all accounts, in the same household. While a manager sleeve, such as large cap growth, still exists, sleeve level performance itself doesn’t exist, it’s just part of the overall household performance. Individual manager performance also doesn’t exist on a segregated basis in an UMH account, Andrew contended.

I would disagree with Andrew on this point. I believe that just because a sponsor doesn’t need to report individual performance, there are still important reasons for sleeve-level reporting. Corporate actions, for example. How are they handled when the same security is held by two or more managers in the same UMA? Without sleeve-level identification of tax lots, managing corporate actions is difficult, to say the least. — Craig

For UMA sponsors, what is your focus on client segments?

Merrill Lynch has multiple investment platforms, Russ explained, and they break them out into three legs: FA-directed, client-directed and firm-directed.

UMA is the chassis on which they want to deliver all of their firm-directed advice, he said. What previously required multiple programs containing traditional separate accounts, mutual fund wrap or other programs are now all rolled up into UMA. They have the ability to provide tax optimization, to rebalance across multiple investment vehicles, and sleeves as well as ability to have a stand-alone offering or allow FA’s to build their own offering through our line of all due diligence, covered strategies, Russ offered.

Customized offerings are constrained to those assets in the program and by registration type. But they have a platform that has the ability, through common pricing, common reporting and common rebalancing to deliver a true UMA, he claimed.

Looking ahead over the next few years, Merrill is driving to take the next steps and get closer to UMH, Russ said, confidently. They’re going to be creating a single advisory program that will have RPM, client-directed and firm-directed in a single contract under a single pricing schedule under a single reporting tool. For advisors, it takes the complexity, such as pricing arbitrage and reporting arbitrage, out of delivering advice.

They won’t have a full UMH, in the near future, where they can go across multiple registration types or across different product sets. However, Russ assured us that they’re looking to expand the breadth of investment offerings in their UMA program.

UMA definitely is garnering a lot of attention at WFA, Chris said. From a product-enhancement perspective, that’s where they’re spending most of their time. They’re not pushing one advisory program over another. Overall, UMA is the most immature program and there’s a lot of room for improvement and growth. There’s not been a lot of work being done in the UMH space, he confided.

Because of the independent culture and having financial advisors who want to use their own technologies, LPL has a different approach from these other firms, Tracy told us. They have established unified managed accounts that can handle all investments. Their advisors like to control reporting to clients, so instead of coming up with a single, unified approach, they provide a robust set of tools and allow advisors to take their own approach for their practice. The investing is more centralized, but the management tools and reporting tools can be customized by their advisors, Tracy added.

What is your experience with the willingness of managers to join models-only programs?

Fiserv has 3,500 third party models on their platform, plus maybe double that in internal models, Paul reported. They’ve seen that 85-90% of SMA managers use or manage to models. Fiserv believes this to be a long-term trend, with tremendous efficiencies to be gained, he said.

One of the biggest catalysts for models-only programs is the drive towards UMA, Paul explained. It’s the account structure that Fiserv is advising their clients to implement. From the ability to offer advice and product neutral solutions, the UMA facilitates this.

Paul referenced MMI’s third quarter newsletter (MMI Central), which contains an article titled, “Market Uncertainty Causes Industry to Pause”:

Our interviews with industry leaders indicate that financial advisors and investors are staying the course, at least for now. No significant trends have emerged across the advisory industry such as material shifts to cash or movements between advisory programs or among asset classes. This may be the calm before the storm. Or, it may be that sponsor firms are more prepared to address investor concerns. Enhancements to advisory programs, such as enabling investors to hold up to 35% of advisory assets in cash, the introduction of more tactical managers and better prepared advisors will help to quell investor fears in the short term.

A lot of Fiserv clients want to take a step back and look at model management very broadly, Paul continued. They want to make sure they have an effective model management process that is effective from the idea all the way through to implementation and reporting.

Fiserv is consulting on many levels with their clients, Paul said. Not only about implementing their UMA programs, but also their model management process. “Clients want to implement it right the first time,” he insisted.

Wells Fargo is in the process of moving to a models program and have been doing a lot of due diligence and talking to a lot of managers about providing their models, Chris informed us. Almost all of the managers they’ve spoken to are open to the idea of providing models. 95% already provide models to another sponsor firm. From the Wells perspective, the willingness is definitely there, it all comes down to the specific strategy, he assured us.

Russ told us that Merrill has already migrated their traditional separate accounts program entirely to models only. 99% of their existing managers agreed to participate in the program. It’s a bigger mindshift for larger firms, Russ claimed, since they have to give up trading control and due to the fee impact. They allow some managers to step in and they manage dispersion, he said.

This post is part 1 of a multi-part series. Additional posts are on their way that cover the rest of the panel sessions.

Now that you’ve read the entire article, did you agree with everything written? Did you disagree with anything? Either way, let your feelings be known by posting a comment below!