In the nearly 30 years that I have been covering financial advisors, the fundamental problem hasn’t changed: Delivering client-centered advice isn’t as profitable as selling products. Consequently, independent RIAs don’t get much respect, or at least, not nearly the respect they deserve. Fund companies prefer to focus on wirehouse and other broker distribution channels. Congress inexplicably has concluded that RIAs (rather than non-fiduciary brokers) need more regulation, and even most custodians that serve them seem to have a hard time committing to the RIA market.
With this conundrum firmly in the back of my mind, I was pleasantly surprised to find recently that American Beacon Funds was still among the handful of investment companies that consider independent RIAs as one of their core markets. This was particularly amazing considering that three years ago the pension fund manager brought in a big-time investment company executive as its new president and CEO, which, in my experience, is often an indicator of a firm’s intent to move beyond the RIA channel.
But Gene Needles isn’t your typical investment company exec. To be sure, he’s got the credentials: In his nearly 30-year career prior to taking the helm at American Beacon, he’s served as vice president at Putnam Investments and Metlife State Street, president of Touchstone Investments, and president and CEO of AIM Distributors. Perhaps due to his broad experience, Needles doesn’t seem to suffer from the “bigger is better” prejudice that’s so common in the financial services industry. In fact, he’s developed a unique perspective on the industry, one that has undoubtedly contributed greatly to his success.
“We look at the RIAs as a single firm so we can see how much biz we’re getting from that channel,” he told me. “If you don’t look at them collectively, the RIAs will pale in comparison to large retail and institutional outlets. But they are plenty big when you add them all together in the same way other firms look at, say, all the Merrill branches.”
Playing off its roots as the manager of American Airlines’ employee pension fund, American Beacon has historically attracted the majority of its assets—about 75%—from retirement plan platforms. The remaining 25% came from independent RIAs. As you might expect, Needles has worked to diversify the company’s distribution beyond those two channels. “Now we’re seeing a better balance in our assets,” he says, “with 40% coming from retail outlets. Still, the two hardest spaces to penetrate are the RIA and retirement markets. It’s a great biz, and we don’t want to forget about it.”
In addition to a healthy respect for their business, the firm has something else in common with RIAs: expertise in selecting and monitoring investment managers. While it’s recently added a few single manager funds, American Beacon’s stock in trade is combining big-name, high-minimum institutional investors into funds that are accessible to advisors’ clients and participants on pension platforms.
In more than a quarter century of analyzing, selecting and monitoring some of the world’s best investors from an institutional perspective, the American Beacon team has become pretty savvy about how to put together and manage multimanager portfolios. Needles candidly points out four key mistakes that advisors and other professional investors often make, usually to the detriment of their portfolio returns—and their clients’ success:
Treating retail investors as if they are institutional investors. Needles believes that using style-box asset allocation in the retail market has been a major mistake on the part of financial advisors. “I think we’ve seen a move away from category asset allocation,” he says. “The problem is that it treats retail investors as institutional investors. Even if we take the emotion out, they are still different. Their time horizons are different, and they can’t diversify nearly as much. Consequently, they can’t weather the downturns. I think that’s why we’re seeing a lot of advisors going back to objective-based investing rather than benchmarks.”