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State Street Lags With Financial Advisers as Market Share Slips

(Reuters) - State Street, which sold the first exchange-traded fund in 1993, is falling flat in its bid to win back market share in the ETF industry by wooing advisers to retail investors, with many advisers saying the bank doesn't do enough to support them.

State Street, which lost its long-time No. 2 spot among ETF providers in the first quarter to Vanguard Group, does less than its competitors in giving them the data, investment tools, and ideas they need to improve their wealth management practices, several advisers to the fast-growing retail ETF market said.

"State Street is a notable laggard in adviser support," said Larry Glazer, a managing partner at Mayflower Advisors, which oversees $2 billion in State Street's hometown of Boston. "Given State Street’s scale and first mover advantage as an ETF pioneer, they have abysmal adviser support. It's almost a laughing matter in the industry."

The assessment comes more than a year after State Street began a multi-year effort to bolster its adviser support organization and combat a widening loss in market share, by adding staff, poaching senior executives from rivals and trimming fees. The bank ranked fifth among ETF providers in how loyal advisers are to their brand, according to a survey last year of almost 1,500 advisers by Cogent Reports, a Cambridge, Massachusetts research firm.

"I'm not surprised some of these things haven't caught up," said Jim Ross, the head the ETF business for State Street Global Advisors (SSgA), the asset management arm of the bank. "It takes time to build."

The stakes are becoming clearer. Rival Vanguard's ETF assets had an organic growth rate of 26 percent in 2014, compared with State Street's 10 percent. Since 2011, State's Street's U.S. market share has dropped about 5 percentage points to 20 percent, while Vanguard has gained 6 percentage points to 21.8 percent.

As a result, earlier this year and for the first time, Vanguard moved past State Street to No. 2 in total U.S. ETF assets with $478 billion, compared with State Street's $458 billion. BlackRock's iShares ETFs rank No. 1 with $1.1 trillion in assets globally.

Financial advisers hold the key to penetrating the retail market because they are among the heaviest users of ETFs in constructing investment portfolios. ETF assets are projected to double to $5 trillion by 2020, according to a PwC survey.

In 2013, SSgA decided to make a substantial investment to reinforce its adviser support organization. Since the beginning of 2014, for example, it hired 45 people to increase the size of its distribution organization to 138 employees, said Ross, who declined to give a specific figure for what State Street invested.

SSgA also has launched 109 new ETFs since 2011, including one recently with DoubleLine's star bond manager Jeff Gundlach, and boosted efforts to produce more research to help advisers educate their clients about tax management, wealth transfer and raising financially independent children.

To get on track with advisers, the bank poached a number of senior executives from rivals such as Morgan Stanley, UBS Wealth Management and BlackRock Inc. Its recent hire of Ronald O'Hanley, the former asset management chief at Fidelity Investments, underscores the importance of penetrating the retail market where advisers hold growing sway.

State Street also slashed fees on 41 of its SPDR ETFs earlier this year, joining a years-long price war that has entrenched Vanguard and BlackRock.

Despite being a pioneer in the ETFs, State Street is still best known as the world's No. 2 custody bank. It safeguards $28 trillion in assets, and that's where it gets most of its revenue and profit. In 2014, State Street's investment management unit, which includes ETFs, generated $1.3 billion in revenue, or about 13 percent of the company's total revenue. Custody and asset servicing generated nearly all of the rest.

Ben Johnson, an analyst with Morningstar in Chicago, said State Street's challenge is cultural.

For State Street, "asset management is a secondary business," he said. "They've been geared, they've been tooled, and they've been built to deal with institutional investors and not necessarily toward a more adviser audience."

Meredith Rice, senior director at Cogent, said advisers give State Street high marks for having a broad range of ETF products that are easily traded. "The only thing with State Street has been their institutional focus," Rice said. "Their rivals are more focused on retail."

Reliance on institutional investors - hedge funds, pension funds, asset managers and Wall Street banks that are the bread and butter of State Street's custody business but who sometimes use ETFs for hedging and shorting markets - also has added a volatile dimension to State Street's ETF business.

In January, for example, investors withdrew $28 billion from State Street’s big SPDR S&P500 ETF, or 13 percent of assets, according to Lipper Inc data. By contrast, BlackRock's comparable iShares fund held about steady and Vanguard's S&P 500 ETF had net deposits of $1.5 billion.

"Honestly, I don't lose sleep anymore about the big swings in outflows in SPY," Ross said. "There is not a competitor of mine in the ETF space who wouldn't want SPY in their business."

 

(Reporting By Tim McLaughlin; Editing by Richard Valdmanis and John Pickering)

TAGS: ETFs
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