WEBVTT - Steve Cook on Impact of DOL Rule (Audio)

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<v Speaker 1>You're listening to Taking Stock with on Bluebird Radio. New rules, No,

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<v Speaker 1>not new rules from Bill Moore, a new rules from

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<v Speaker 1>the Department of Labor that could affect not only your investments,

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<v Speaker 1>but your relationship with your investment adviser. Here to tell

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<v Speaker 1>us more Stephen Cook, Managing director and business executive for

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<v Speaker 1>Structured Products Services for B n Y Melon Asset Servicing,

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<v Speaker 1>and he's joining us live from the E t F

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<v Speaker 1>Exchange Program. It's a B and Y Melons et F

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<v Speaker 1>symposium in Data Point, California. Stephen Cook, thank you very

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<v Speaker 1>much for being here. Thanks for having me. It's great

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<v Speaker 1>to be back. All right, So just define what are

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<v Speaker 1>the new rules from the Department of Labor and how

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<v Speaker 1>do you think that they are going to affect the

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<v Speaker 1>role of exchange traded funds in the portfolios. Well, the

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<v Speaker 1>d o LL conflict of interest rules are basically setting

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<v Speaker 1>forth a platform or guidance that states that in advisor

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<v Speaker 1>who's advising a client on retirement assets for one K

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<v Speaker 1>assets are required to put the interest of the investor

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<v Speaker 1>the client first. Uh. And so the thought is that

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<v Speaker 1>traditional broker dealers who may have in the past um

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<v Speaker 1>made decisions and other factors are really going to be

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<v Speaker 1>required in everything they do to put the client interests first,

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<v Speaker 1>and so it's going to force them to look at

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<v Speaker 1>things differently. Fees that clients pay for their exposure UM,

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<v Speaker 1>how they go about gaining certain exposures in an asset

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<v Speaker 1>allocation model, and the appropriateness for that client to be

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<v Speaker 1>in specific products, and so the structure of et s

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<v Speaker 1>because they tend to be low cost, because they're transparent

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<v Speaker 1>and everybody understands clearly what they own, are really going

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<v Speaker 1>to benefit from these new rules as they've been written.

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<v Speaker 1>That's very interesting. Um So, who will benefit most from that? Well,

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<v Speaker 1>I think a number of individuals. First. Obviously investor hopefully

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<v Speaker 1>will benefit UM you and I as we invest in

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<v Speaker 1>our foreign K platform, but certainly the t F issuers

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<v Speaker 1>are going to benefit that long term in terms of

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<v Speaker 1>drawing assets. We did a study with approximately a hundred

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<v Speaker 1>and seventy investment advisors and what came back is that

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<v Speaker 1>the large percentage of those investment advisors are going to

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<v Speaker 1>start recommending at a much higher percentage e T s

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<v Speaker 1>to be a larger UH investment for their clients than

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<v Speaker 1>other potential products that's in the past. So For instance,

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<v Speaker 1>if an advisor had had twenty three percent of clients

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<v Speaker 1>assets and e tps in the past, moving forward, they're

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<v Speaker 1>going to look to increase at allocation to so increase

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<v Speaker 1>and net new assets flowing into e t f s

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<v Speaker 1>over what you've seen previously. Why would that happen? Is

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<v Speaker 1>it because uh, E t f s are perceived as

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<v Speaker 1>being less risky. I mean they there's no real sort

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<v Speaker 1>of definition of well, they're less sky, they're more risky.

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<v Speaker 1>I mean, it really depends on what you've selected. And

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<v Speaker 1>if that's the case, is it that money managers and

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<v Speaker 1>asked that allocators they're going to just go with what

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<v Speaker 1>they believe to be safe because number one, they don't

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<v Speaker 1>want to be suited and number two, they don't want

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<v Speaker 1>to be put out of business by the Department of Labor.

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<v Speaker 1>It's not necessarily about safety. It's about utilizing the best

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<v Speaker 1>building blocks for an esset allocation model. And in the

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<v Speaker 1>past many have thought that might be actively managed funds.

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<v Speaker 1>They're trying to beat the market, they're trying to have

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<v Speaker 1>their clients overall performance outperformed what they could get from

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<v Speaker 1>the index fund. But I think if you look historically,

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<v Speaker 1>we've seen trends that managers are not able to outperform markets,

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<v Speaker 1>and you're paying quite a bit for that management. So

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<v Speaker 1>if you have an actively managed mutual fund, they might

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<v Speaker 1>be charging a hundred and twenty basis points or a

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<v Speaker 1>hundred and fifty basis points. If you can get an

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<v Speaker 1>e t F that tracks an index that actually outperforms

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<v Speaker 1>those actively managed funds and does so at a cost

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<v Speaker 1>of seven to eight to nine basis points, you're talking

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<v Speaker 1>a huge opposite. But in Jack Bogle we're here, you know,

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<v Speaker 1>legendary founder ban Card, he'd say, so why just buy

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<v Speaker 1>an index fund? Why do you need to get an

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<v Speaker 1>e t F. Certainly some optionality exists there, but I

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<v Speaker 1>think if you look at the e t F s uh,

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<v Speaker 1>they're much more tax efficient. Doesn't necessarily always help in

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<v Speaker 1>a tax advantage asset class like an r RA A

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<v Speaker 1>or four one K, but the ability to draw assets,

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<v Speaker 1>have them exist alongside taxable investments and non taxable investments

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<v Speaker 1>and get the benefits of the structural efficiencies that exists

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<v Speaker 1>in e t F. It's just cheaper to put in

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<v Speaker 1>E t F together than as a mutual fund. It's

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<v Speaker 1>cheaper to have one ongoing operated and so the cost

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<v Speaker 1>efficiency associated with that, along with the tax efficiency really

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<v Speaker 1>puts investors in advantage in a long term and allows

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<v Speaker 1>advisors to really benefit or adhere to the d o

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<v Speaker 1>L rules and the spirit of them and really give

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<v Speaker 1>their clients the best access. In another area, if you look,

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<v Speaker 1>the structure allows itself to be include of commodities of

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<v Speaker 1>other asset classes that may not be as correlated to

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<v Speaker 1>the overall market, and because it naturally fits with those

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<v Speaker 1>types of asset classes, it gives advisors a lot more

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<v Speaker 1>in the way of choice as to how to go

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<v Speaker 1>ahead and manage their client's portfolios. Just last point, If

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<v Speaker 1>that's the case, does that not mean that the registered

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<v Speaker 1>rep or the money manager is going to have an

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<v Speaker 1>even more challenging time because now you've opened up the

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<v Speaker 1>menu to include all these different types of ETFs, they

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<v Speaker 1>are going to have a more challenging time. And it's

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<v Speaker 1>really gonna be on the issuers of e T S

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<v Speaker 1>and the industry at large, folks like bny Mellen to

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<v Speaker 1>help the marketplace, to help advisors understand these products and

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<v Speaker 1>to help them help adopt them into their client's portfolio.

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<v Speaker 1>So you're going to have to see the need for

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<v Speaker 1>issuers for the et F industry to really educate, not

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<v Speaker 1>just for folks who have already been buying E t

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<v Speaker 1>F for the last ten years, but really the new

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<v Speaker 1>folks who are gonna have to adopt them as a

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<v Speaker 1>part of this d O L standards. So you are

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<v Speaker 1>going to see the need for a lot more education,

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<v Speaker 1>a lot more understanding in the marketplace. Alright, Well, understanding

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<v Speaker 1>the marketplace always useful. Steve Cook, thanks for joining us.

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<v Speaker 1>Thanks for having me, folks, it was great to be here.

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<v Speaker 1>He's managing director and business executive for Structure Product Services

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<v Speaker 1>being White Melton Asset Servicing, and we've had a terrific

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<v Speaker 1>time today at et F Exchange sixteen Ideas Innovation Interaction

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<v Speaker 1>being Why Melton's annual conference here in Dana Point, California.

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<v Speaker 1>I'm Kathleen Hayes along with Pim Fox, and this is Boomberg.