Issues Facing the 

U.S. Money Management Industry 

Michael L. Goldstein

FMMI Inc.

Presentation to the 

SEC Asset Management Advisory Committee
Issues Facing the U.S. Money Management Industry

Topics

2

• The Really Big Picture

• The Rise of Indexing and Investor Price Sensitivity

• What is Advice?

• Conclusions
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250

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45

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2002 2010 2019E

As a Share of GDP

Total Assets

U.S. Money Management Industry Assets

Total and as a Share of GDP

2002 Through 2019E

Total Assets As a Share of GDP

$ Trillion %

The U.S. Industry is Around $45 Trillion in Size...

3
Defined-Benefit Plans2

Endowments

Foundations

Insurance

Company

Outsourcing

DefinedContribution

Plans

IRAs

Retail Mutual Funds

Variable Annuities3

Separate Accounts

ETFs

Bank Personal Trusts

College Savings Plans

Alternatives

The U.S. Money Management Industry

Sources of Assets Under Management1

2018

1 Not including federal government pension plans.

2 Excludes unfunded portion.

3 Excludes variable annuities held in defined-contribution and IRA retirement plans.

Institutional

Investors'

Assets

Retail

Investors'

Assets

Other 

Retirement

Assets

...And It Has a Retail Character...

4
0

10

20

30

40

50

60

70

80

90

100

2000 2010 2018

The U.S. Money Management Industry

Composition of Assets Under Management

2000 Through 2018 

Defined-Benefit Pension Plans Other Institutional Categories1

Defined-Contribution Plans2 IRA Accounts

Retail Mutual Funds/ETFs and Others3 Retail Separate Accounts, Trusts and Alternatives

1 Endowments, foundations and outsourced insurance assets.

2 Includes 401(k), 403(B), 457 and union defined-contribution plans.

3 Includes variable annuities and college savings plans.

4 Includes hedge funds and private equity funds.

%

4

Institutional

Investors

Other

Retirement

Assets

Retail

Investors

...That’s Increased Over Time...

5
0

5

10

15

20

25

30

35

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

Corporate Defined-Benefit Plans

Number of Participants

1975 Through 2017 Million

Active 

Participants

2017

...As the ERISA Era Has Come Full Circle

6
0

2

4

6

8

10

12

14

16

18

20

0

500

1,000

1,500

2,000

2,500

3,000

Money

Market

Funds

(1979-1982)

Equity

Mutual Funds

(1992-1999)

Hedge

Funds

(1996-2007)

All ETFs Private Equity +

Venture

Capital

U.S. Equity

Mutual Funds

and ETFs

As a Share of GDP

Net Flows/New Capital Raised

Net Flows Into Mutual and Hedge Funds and ETFs

and New Capital Raised by Private Equity and Venture Capital Firms

Totals and as a Share of GDP

Various Periods: 1979 Through Late-2019

Flows/New Capital Raised As a Share of GDP

$ Billion

2010 Through Late-2019

%

The Stars Aligned to Produce a Series of Fund-Raising Booms...

7
0

1

2

3

4

5

6

7

8

9

10

2000 2010 2019E

The U.S. Money Management Industry

ETF and Private Equity Assets as a Share of The Industry Total

2000 Through 2019E

 ETFs Private Equity

%

...That Have Once Again Transformed the Character of the Industry

8
0

2

4

6

8

10

12

14

16

18

20

47 51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11 15 19

The S&P 500 and Long-Term Government Bonds

Annualized Trailing 20-Year Returns

1947 Through 2019

Recessions Long-Term Government Bonds S&P 500

%

Returns Impact Retail Investor Behavior...

9
1.5

2.5

3.5

4.5

5.5

6.5

7.5

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

U.S. Endowments

Average Spending Rates

and Composite Yield of the U.S. Bond Market1

Years Ending June: 1998 Through 2019

Spending Rates Bond Market Yield

1

Based on the Bloomberg Barclays US Aggregate Index.

%

...And That of Institutions as Well

10
0

10

20

30

40

50

60

70

80

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

U.S. Households Age 55 Yrs. and Older

Share of Discretionary Financial Assets

1989 Through 2016

55-64 Yrs. 65-74 Yrs. ≥75 Yrs.

%

The Aging of Boomers Has Been a Critical Dynamic...

11
Bottom 90%

90th to 99th Percentiles

Top 1%

U.S. Households

Distribution of Discretionary Financial Assets

By Net Worth Cohort

2016

...That’s Been Boosted By Skewness in the Distribution of Wealth...

12
0

2

4

6

8

10

12

30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78

Age

Probability of Receiving an Inheritance

By Age and Income Group

1995 Through 2016

Bottom 50% 50th to 90th Top 10%

%

...And the Combination of the Two Has Shown Up in Inheritances

13
0

10

20

30

40

50

60

70

80

25-34 35-44 45-54 54-65 65+

What Will be More Important in Three Years?

An Investment Professional or the Latest Investment Technology Platform

Share of Responses by Age Group

2018

Investment Professional Technology Platform

%

Demographics Have Worked to Slow the Rates of Change

14
0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Annualized

U.S. Private Equity and Venture Capital

New Investments as a Share of the Market Value of U.S. Publicly-Traded Equities

2006 Through September 2019

Private Equity Venture Capital

%

The Impact of Private Capital on the System Has Been Consistent...

15
0

1

2

3

4

5

6

7

8

9

10

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Median Years from 

First Venture Capital Financing to IPO

Year of IPO

Median Age of Venture Capital-Backed Start-Ups

at the Time of Their IPO

Years 1992 Through 2016

...And Start-Ups Have Stayed Private Longer...

16
(5)

0

5

10

15

20

25

30

35

40

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Venture Capital-Backed IPOs

Share of Pre-IPO Investments Coming from Mutual Funds

1995 Through 2016 %

...As the Investor Bases Have Converged

17
0

2

4

6

8

10

12

14

16

18

20

Retailers Hotels/

Casinos

Other

Consumer

 Cyclicals

Media TechnologyCapital

Goods

Energy Other

Commodities

TransportsHealth

Care

TelecomConsumer

Staples

Utilities

Sector Mix of Corporate Debt Outstanding

Leveraged Loans Compared to the Long-Term Debt of Public Companies1

As of Q3 2019

Leveraged Loans Public Company Long-Term Debt

%

1The public company data is the long-term debt of the largest 1,500 stocks.

Consumer Cyclicals Commodities

Cyclicals Others

The Sector Mix of the Debt Tells a Story

18
Issues Facing the U.S. Money Management Industry

Topics

19

• The Really Big Picture

• The Rise of Indexing and Investor Price Sensitivity
0

5

10

15

20

25

30

35

40

45

50

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

YTD

Indexed Equity Fund and ETF Assets

Share of All Long-Term Equity Mutual Fund and ETF Assets

1993 Through November 2019

Indexed Equity Mutual Funds Equity ETFs

% Institutions

2018

Indexing Gained Enormous Share in the 2010s...

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0

1

2

3

4

5

Passive Indices Style-Based Indices Sector-Based Indices Factor-Based

Morningstar Ranks

U.S. Equity ETFs

Average Morningstar Star Ranks1 

As of November 2019

1Asset-weighted averages.

...As There Was No Need to Venture Elsewhere

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0

5

10

15

20

25

30

35

40

Large-Cap Funds Mid-Cap Funds Small-Cap Funds International Funds Emerging Markets

Funds

Actively-Managed Equity Mutual Funds

Share Outperforming Their Benchmarks1

2009 Through Q2 2019

2009 - 2013 Q3 2014-Q2 2019

1Includes funds that have disappeared, via merger or otherwise.

%

U.S. Equities

The Performance of Active Managers Has Been a Big Part of the Story...

22
(210)

(180)

(150)

(120)

(90)

(60)

(30)

0

Last Five Years Disaggregation By Source

Holdings of Cash Holdings of Non-U.S. Stocks Fees Other

bp

Actively-Managed Large-Cap U.S. Equity Mutual Funds

Annualized Underperformance Relative to the S&P 5001

2010 Through Mid-2019

1Equally-weighted composite. 

...And the Classic Rationales Tell Most of the Tale

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0

10

20

30

40

50

60

70

80

1970s 1980s 1990s 2000s 2010s

U.S. Real-GDP Quarterly Growth Rate Forecasts

Share of Quarters Underestimated and Overestimated by Decade

1970 Through Q3 2019

Underestimated Overestimated

%

The Economy Hasn’t Cooperated...

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(60)

(50)

(40)

(30)

(20)

(10)

0

10

20

30

1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s Last

Five

Years

Large-Capitalization Stocks

Correlation Between Sectors' Relative Returns and Their Tracking Error1

1930 Through 2019

%

1 Relative returns and tracking error computed over a trailing three-year window using monthly, capitalization-weighted data. 

Decades

Outperforming Sectors Have Higher Tracking Errors

Outperforming Sectors Have Lower Tracking Errors

...And It’s Been a Mistake to Be Too Active...

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2

4

6

8

10

12

14

53 57 61 65 69 73 77 81 85 89 93 97 01 05 09 13 17

Large-Capitalization Stocks

Free Cash Flow Margins By Quintiles of Market Capitalization1

1953 Through Mid-December 2019

Recessions Highest Quintile All Others

1 Measured in aggregate; trailing four-quarter data smoothed on a trailing six-month basis.

%

...As the Margins of the Largest Companies Nearly Tripled

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(600)

(500)

(400)

(300)

(200)

(100)

0

100

200

300

400

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Actively-Managed Mutual Funds

Flows by Expense Ratios: Lowest 20% and the Rest

2000 Through 2018

Lowest 20% The Rest

$ Billion

Pricing Has Become a Focus...

27
0

10

20

30

40

50

60

70

Low

Expense

Ratio

#1

Total

Costs1

#2

Tracks

an Index

#3

Reputation

of Sponsor

#4

Past

Returns

#5

Morningstar

Rating

#10

ETF Investors

Extremely Important Factors When Evaluating ETFs

Share of Respondents

2018

1 Expense ratios, commissions, bid/ask spreads.

%

...And Ratings Have Mattered Less Than in the Past

28
0

5

10

15

20

25

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Q3

19

Institutional and Retail Investors

Indexed Equity Assets

As a Share of the U.S. Large-Cap Market

2004 Through Q3 2019

Institutional Retail

%

The Tail Doesn’t Look Large Enough to Wag the Dog...

29
(3.5)

(3.0)

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

All Funds U.S. Stock

Funds

International

Stock Funds

Taxable Bond

Funds

Stock Fund

Investors

1997-2017

Dalbar Analysis

All ETFs Sector and

Smart-Beta

ETFs

Mistiming by Mutual Fund and ETF Investors

Realized Versus Asset Class Returns

2007 Through 2019 %

Morningstar Analysis

Ten Years Ending Q1 2018

2007-2019

Analysis of ETFs with

Top-Quintile Inflows

Measured Over One-Year Periods

...Although the Mistiming of Investments Remains an Issue

30
• The Really Big Picture

• The Rise of Indexing and Investor Price Sensitivity

• What is Advice?

Issues Facing the U.S. Money Management Industry

Topics

31
Broker

Investment Manager

Financial Planner Wealth Manager

Financial Advisor Job Descriptions

Share of Respondents

2018 

Financial Advisors are Now Wealth Managers...

32
0

10

20

30

40

50

60

70

80

Four National Firms Other Broker Dealers RIAs Banks and Trusts

U.S. Equity Mutual Fund and ETF Holdings by Channel

Share in Index Funds and ETFs

As of September 2019 %

...With Indexing at the Heart of What They Do

33
0

20

40

60

80

100

120

140

160

180

1985 2000 2008 2014 2019 2019

Using ETFs

National Full Service Brokerage Firms1

Fees for Advice Plus Mutual Fund Expense Ratios2

Select Years: 1985 Through 2019

Advice Fees Mutual Fund Expense Ratios

.

1Currently Morgan Stanley Smith Barney, Wells Fargo and Company, Bank of America Merrill Lynch and UBS Wealth Management.

2Mutual fund expense ratios are asset-weighted and exclude 12B-1 fees.

bp

The Price of Advice Has Gradually Come Down... 

34
0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Mass

Market

$100,000

Middle

Market

$300,000

Mass

Affluent

$750,000

to

$1.5 Million

Affluent

$1.5 Million

to

$5 Million

HighNetWorth

$10 Million

National

Brokerage

Firm

Average

National

Firms

Schwab,

Vanguard

and

Fidelity

The Price of Advice

Asset-Weighted Fees by Market Segment

2017 

Robo-Advisory

Programs

%

Industrywide Averages

...And the Pressure is from Both Outside and Within

35
0

10

20

30

40

50

60

70

80

90

Firm

 1

Firm

 2

Firm

 3

Firm

 4

Firm

 5

Firm

 6

Firm

 7

Firm

 8

Firm

 9

Firm

 10

Firm

 11

Firm

 12

Firm

 13

Robo Advisors

Equity Allocations in Taxable Accounts and Their Domestic Shares

Q3 2019

Equity Allocations Domestic Shares of Equity Allocations

%

Most Robo-Advisory Asset Allocation Schemes are Similar...

36
0

1

2

3

4

5

6

7

Firm

 1

Firm

 2

Firm

 3

Firm

 4

Firm

 5

Firm

 6

Firm

 7

Firm

 8

Firm

 9

Firm

 10

Firm

 11

Firm

 12

Firm

 13

Std.

Dev.

Robo Advisors

Trailing Two-Year Annualized Returns in Taxable Accounts

% As of Q3 2019

...As Apparent in the Distribution of Returns

37
0

500

1,000

1,500

2,000

2,500

3,000

3,500

Individual

Investors

Assets

Advisor

Assets

Individual

Investors

and

Advisor

Assets

BlackRock

iShares

Bank

of

America

Merrill

Lynch

Morgan

Stanley

Wealth

Management

UBS

Wealth

Management

Americas

Wells

Fargo

and

Company

The Vanguard Group, iShares and 

the National Full-Service Brokerage Firms

Retail Assets Under Management/In Custody

2007 and 2018

2007 2018

$ Billion

The Vanguard Group

Retail Assets Under Management Retail Assets in Custody

There’s Been a Shift in the Landscape

38
Agree

Somewhat/ Neutral

Disagree

U.S. Defined-Contribution Plans

Employer Has Responsibility to Improve 

Employee Financial Wellness: Share Agreeing

2018 

The Bar for Service Keeps Moving Up

39
Issues Facing the U.S. Money Management Industry

Conclusions

40

• The trends in the industry are byproducts of those in the global economy. 

Demand fosters supply. 

• The dominance of the baby boomer generation among asset holders has 

created inertia, thus far limiting disruption on some fronts. 

• The nature of the advice proposition has changed with the shift toward

indexing.

• The distinction between money managers and distributors has become

increasingly blurred. 

• Corporate free cash flow generation, low-cost money management/liquidity 

along with cheap leverage were the themes of the 2010s.