Traditional asset managers have a new foe: advisors who are looking to replace them with lower-cost passive products so their clients can spend their fee budgets on high-cost hedge funds.
That's according to a panel of financial advisors discussing the implementation of alternative investments in client portfolios at the SkyBridge Summit, held in New York on Monday and hosted by Anthony Scaramucci's fund-of-hedge-funds firm SkyBridge Capital.
“With margins squeezed, we’ve just taken more expensive traditional managers and gone to cheaper beta,” said Maureen Shuler, a financial advisor at Morgan Stanley. “We’re willing to pay more where you have managers with skill.”
With stock prices at high valuations and bonds struggling against the threat of rising interest rates, investors may have no choice but to pay high fees to get access to alternative strategies, the panelists said.
Still, investors and advisors continue to field questions and concerns about hedge fund fees, even when performance net of fees is solid, according to the panelists.
Marcie Behman, managing director of private wealth management at Merrill Lynch, said the firm allows advisors to buy hedge funds with an upfront fee or on its managed platform, where clients pay an asset-based advisory fee. “If a fund is available on the managed platform that’s how we’ll buy them,” she said.
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To address expenses, Merrill Lynch is moving to make costs entirely transparent and break down every fee.
“We wouldn’t recommend them [hedge funds] if they didn’t add value, but the fee discussion comes up every time. The best thing to do is get it out there,” said Behman.
But for the right managers, she says, “We believe the fees are worth it.”
After joking that his firm makes the fine print on fees very small, Michael Rosloniec, institutional consulting director at Morgan Stanley, said alternatives can be costly.
“We have a blunt discussion on fees,” he said. “In the environment we’re in, we have to look at other asset classes, and it’s not cheap.”