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May 26, 2016

The DOL's new rule - A headwind for active managers?

Bill Miller

There is a continuing move towards ETFs and indexing, which I believe is a secular trend, and the new Department of Labor rules on the fiduciary responsibility of the advisors may become an additional impediment to active managers regaining share from ETFs. My old friend Ralph Wanger, who ran the Acorn Fund for close to 40 years and is now retired, has been studying these regulations.

After reading the 70-page executive summary, he thinks the way in which the rule was written is very negative for active managers. There is a lot of commentary in there about how money managers waste clients' money, active management doesn’t add value, and how low cost ETFs are the way to go.

He said this message is likely to be interpreted as, “If you buy active managers and they underperform, people could say that you're liable because active management doesn’t add any value.” This could have a very chilling effect on the ability of advisors, especially those that work at large firms, to manage assets in the best interests of their clients, as they are subject to one size fits all compliance and risk management. Ralph's view, which I think is certainly plausible, is that if you're an active manager and you’ve underperformed for the past one or two years, it will be very difficult for an advisor to keep clients in your account for fears that they would be in fault of their own compliance regulations or because clients will accuse them of wasting their money with active management. Unfortunately, a major unintended consequence and fault of this regulation is that it will likely push investors to buy a fund after it has created a lot of value and sell after a bad period, exacerbating people's tendency to buy what's hot and sell what's not. So I think that it’s worth closely watching especially as it relates to how large firms implement these rules over the next year or so.

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