Financial markets are constantly evolving, and that lesson has been on prominent display dating back to the Coronavirus market swoon of March 2020.
That means client desires and needs aren't static. Gone are the days when cookie cutter 60/40 portfolios would carry the day in terms of improving client outcomes and satisfaction. Translation: It's vital that advisors evolve with the times and see adding value as a function of the future, not the past. NS Capital is a prime example of a money manager that's doing just that.
“NS Capital was formed in 2010 to offer a new standard of investment advisory and portfolio management services,” according to the firm. “Everything we offer has been developed and paid for using our own resources. That fact means that we have no third-party affiliations that could influence or distort our independence and objectivity. This makes it possible for NS Capital - unencumbered by the legacy thinking and conflicts of the status quo financial services industry - to offer fully transparent and conflict-free investment advice and portfolios to individuals and small businesses.”
NS Capital is a true fiduciary, helping clients avoid issues that have plagued the advisory business for generations, including biased portfolio construction, lack of transparency and high fees. Those are building blocks for enhancing client relationships.
NS Capital: Breaking from the Pack
For decades, a bread-and-butter revenue generator for many advisors was recommending actively managed mutual funds to clients. Advisors were incentivized to do that by their parent companies and third-party distributors. However, that strategy didn't always bear fruit in terms of improving client outcomes, which should be advisors' primary concern.
“We saw the business of active management fail over and over, and that failure increasing in more dramatic ways, said NS Capital founder and Senior Managing Director, Lou Day. “Today, if you look at the true risk of active management, it's not short-term under-performance. What happens, even to the best managers, is value destruction over time created through wasted fees and costs.”
That point is well-taken, particularly as 2021 is shaping up to be another record year of inflows to exchange traded funds, which broadly speaking, carry lower fees than actively managed funds. As Day rightly points out, fees and costs are destructive to long-term client outcomes.
One example of NS Capital’s combating the scourges of high fees that do not add value is their concept of fee correlation where they charge an advisory fee based on the work required to execute the portfolio strategy. NS Capital runs three portfolio strategies one for defense and two for offense, with two being beta ETF portfolios and one being actively managed. For defense is the Shorter Term Fixed Income portfolio which is predominantly treasury and investment grade corporates, easy to execute – advisory fee 0.20%. Next is the beta global equity ETF portfolio somewhat harder to execute – advisory fee 0.40%. And last the actively managed portfolio made up of boutique money managers identified, selected and monitored by NS Capital – significantly harder to execute – advisory fee 0.75%.
For Day's part, he sees the era of style boxes and excessive benchmark creations as a bygone time because it led to the decline of active stock picking and the rise of closet indexing.
“In the early 2000s, we came to the decision that value proposition for individual investors was broken,” said Day. “Then we began working on finding a solution, which resulted in forming NS Capital.”
Where We Are Today: Expecting More Consolidation
Whether it's among advisory firms or large-scale financial services companies, Day sees margin and profit compression driving more mergers and acquisitions.
Many clients are realizing the fees they're paying aren't commensurate with favorable outcomes and by driving scale, asset management firms can perhaps lower costs in a bid to retain clients. Time will tell if that strategy proves effective.
“This is going to damage the traditional equity active management model even more,” says Day.
He notes consolidation will create more capital chasing a smaller number of above-average active managers. One way of looking at this emerging scenario is that alpha opportunities aren't going to exist in the traditional business model, confirming that advisors need to make evolution and low costs primary elements in their client attraction and retention strategies.