Boking on trillions.
I'm Joel Webber and I'm Eric Belchunis.
Eric.
You know something that you know about is steak dinners. You like to make a lot of bets that involve steak dinners.
We have enough whole.
Episode that is more or less about the steak dinner, only it's a different type of steak dinner.
Yeah.
Look, I mean in the funds business, for decades, there was you know, beating the market. There was low fees, and there was relationships. You know, for a long time they had loads where you literally paid a broker to put the client's money in the fund, and over the years that became like seemingly expensive. But the idea of having relationships and whining and dining advisors and investors is one of the ways that you can actually sidestep the Vanguard effect. And you know, no firm does it better
than First Trust. There's a couple to do it, but I think First Trust is probably the best us at it. And they're the sixth biggest etfi Shure despite not really playing Vanguard's game, which.
Is always of interest to us, as is the story that we're going to talk about on this episode, which cat our I about First Trust by Emily Graffeo and Max Abelson by Bloomberg BusinessWeek. So joining us in this episode, we've got Emily Graffeo, a cross asset reporder for Bloomberg News, as well as Max Abelson, a finance reporter here at Bloomberg, this time on trillions First Trust. Emily, Max, Welcome to Trillions.
That's an honor to be here.
Thanks for having us.
Okay, Emily, you report on ETFs among other things. I'm curious how much you knew about First Trust before you started working on this on this story.
Well, what I knew about First Trust before I started working was I just looked at the data of comparing the largest ETF issuers and then their average expense ratios. So I knew that First Trust was the sixth largest issuer. I knew that they somewhat stayed under the radar. You go to ETF conferences, I never really noticed they were there. A lot of the other issuers have like big booths at these conferences. First Trust seemed to me to almost just stay in their own lane. They didn't market much
to retail. You never really see a First Trust commercial like you do with some of these other issuers like an Invesco qqq AD, and so I knew that they were big. I knew that they were almost you could call them quiet, and I knew that their average expense ratio was much higher than the top competitors when you
look at the league table. And Bloomberg Intelligence actually had this report out estimating that they make almost as much revenue selling ETFs as Vanguard, but they're like fifteen times smaller. So that data almost anomaly, jumped out to me, and it was something that I know Bloomberg Intelligence had done a number of research reports on.
So a quiet but lucrative business model. It's also privately held. Jim Bowen is sort of the person in charge there, right, He's put together a little quiet empire. What do you know about Jim now that you've worked on the story.
So, Jim Bowen has been at the helm of First Trust almost since the beginning. He became the CEO of the company pretty soon after the company started.
You know, in like White House presidential elections there. I don't think people talk about it anymore, but there was that old thing about like do you want to have a beer with them? You know, as a Wall Share reporter, here. There's so many people who I write about who I would really not want to have a beer with. One thing I want to say about Jim Bowen is like, I would definitely have a beer with that guy. He seems very charismatic. He seems very proud of what he does.
He seems to sort of cherish it. And his enthusiasm for his job made made my job easier because it was fun to sort of behold someone and to chronicle someone who gets so worked up about what they do. So many people are like bored or just boring and he and he's neither. He exudes this this confidence and this sense of honor in what First trust does we help the financial advisor because the financial advisor helps the
client and we love that. And I was it was fun fun for me to understand when he meant and to and and to like even do something as simple as like watching his speeches on YouTube.
Also worth mentioning that he did not participate or neither did First Trust in the story, So Emily break down a little bit about what you've learned about how the first trust model works and how that's different than sort of maybe the rest of what has become the prevailing model in the in the ETF.
And right, so first trust sells their funds. They pitch their funds directly to financial advisors who then by select the funds for their end clients. Which we're aware that a number of firms in the ETF industry do that, but their distribution model really stands out. They have what they call wholesalers, which are essentially salespeople that pitch the
funds to the financial advisors. They have wholesalers all over the country who are assigned to small territories, think like just you know, one part of the southern US, to go out to financial advisors and pitch these funds. A lot of ETF companies from at least from my reporting, you know, they'll have a wholesaler who maybe sells both mutual funds and ETFs, or they'll have a relatively small team not really pushing the ETFs onto the financial advisors.
One reason is because there's this saying, as I'm sure you guys know, in the ETF world, ETFs are bought, not sold, so their lower fee that's really where the industry kind of competes. They have a lower fee fund. You mark it to a retail investor. A retail investor just wants to buy the cheapest fund out there. First trust is different. They don't really play that that low fee game. Instead, what they're doing is having these financial
advisors who, from what I understand, are extremely knowledgeable. They pick up the phone when you have a question. If you're a financial advisor, they're there for you throughout the journey of owning this fund. And that's what we know about how their I guess distribution model is a little bit different from these other ETF companies.
Eric, when you break down sort of how that model works and what's in it for advisors who are getting pitched on products, how does that all fit together. This is the side of the industry that we actually don't talk about that much on the on the show.
Yeah, so advisors managed like forty trillion dollars of people's money in America. That's a lot of money. They're the gatekeepers of all that money. So of course they're getting pitched to constantly. Like if you're an advisor and you go to an ETF conference, you're like a rock star. Basically everybody wants to, you know, sell to rockstar, not like no, okay, well, Richard.
Key Erk is pretty famous at these conferences. If you walk with him at a conference, you can't walk.
So I will get pitched for media attention, but I'm sorry. Media attention is under asset allocation. Okay, So I know my place. So these advisors rias up to big advisors are really the sort of bell of the ball at these conferences, and a lot of them now the sales, they don't really want to take calls. I mean, they're
harder to sell to than ever. They don't have loads anymore, and so I think first load, by the way, a load again is what I said earlier, which is where the fund has like a let's say four point seventy five percent load, where let's say it's a blank, blank fund. I would then the client would pay four point seventy five percent of their ore their own money that I would get the broker just for the luxury of putting you in this probably crap fund.
Handler feet.
Yeah, the whole mutual fund industry was built that way. It's almost like a bribe, and there's so much money sitting in bad funds because of it. Now, first trust is a little bit of a throwback, but they don't do that. That is really seventy five percent. Takes a long time to overcome that in performance, and the funds that they were putting those loads on were usually over one percent of an expense ratio plus one percent trading fees. Add it up and the investors barely get any of
the returns over thirty years. This is what Bogel and Vanguard fought against. Now First Trust is a little bit of a throwback, but they still are in the ETF business. Their funds are, you know, forty eight to seven five basis points, so they're definitely more expensive. The asset waight to average vvtfs is eighteen basis points, so they're above that. But they aren't beta like. These are funds trying to
outperform a little bit. They've got smart, beta active, they do a lot of strategies a little different, and I guess their pitch to the advisor is, look, you could do a Vanguard fund, but you do ours and you can have a chance to outperform. We're not that expensive, and you know you like us. I mean, and I think part of the winding and dining is that just to tap that. So we wrote a We were fascinated
by this. And you know, we wrote a piece I don't know, a couple of years ago trying to explain where all flows come from, and we rarely got it down to the three c's, which is cheap, creative or cabernet, and we you know, and I'm not judging it. This is part of how funds and anything is sold. Like if you're in politics and you want another country to do something for you, you're gonna have a dinner with them, You're gonna go golfing. Like it's pretty much just an
old school attempt. Now, a lot of the new issuers what their move now is to do educational stuff like blog posts and they have podcasts. It's more of like a soft cell. I think First Trust is just a little more of the old guard in terms of how they're selling their products.
Here we are first Trust, we know is wielding steak dinners. How is that influencing their business strategy?
Machs All right, well, let me just say something about steak dinners. Besides the fact that every now and then I myself enjoy a good steak dinner.
I probably owe you several actually.
Actually technically you do.
Omi. Thank you for bringing that up. Okay, you know, there is.
Nothing wrong with us steak dinner, and in fact, there's nothing unusual about a steak dinner and finance. It would be really hard to try to find pieces of serious business on Wall Street and in financial capitalism that does
not involve steak dinners of some kind. What is interesting and newsworthy about First Trust, according to emails we reviewed and interviews we did, is that, in order to win business, First Trust has gone up to the line that's allowed by the financial industry self regulatory arm, which is called Finra, and potentially cross that line because what the industry will not let you do, Joel, If I'm the first dress wholesaler and you're the financial advisor, I can't take you
out to use a real example, a three hundred dollars hockey game and also three hundred dollars of food. On top of that, I can't drop off a really nice meal for you and then and then bounce. I can't take you out for what what would go beyond what the industry calls sort of Emily, what are those great words?
It can't be neither.
Extensive, frequent or extensive.
Can't be too frequent, and it can't be too extensive and that makes sense.
Boy, that's a hazy line, though, you know, I.
Think that's actually a really fair point that what we're talking about in the story. This is not a story of bright lines and obvious tomfoolery. This is a story about about a gray area that the industry itself does not say, Eric, you can do this up to X plus eighty one, but if you do X plus eighty two, that's a problem. There is a certain kind of fog
or haziness in the industry. And this story is not a story about First Trust, you know, doing anything that's like as we say, it's not like we it's about buying a freezer full of steak. It's about the ways that First Trust, by its own account, according to one email we have, may have been getting up to that line or maybe potentially crossing it. And of course, of course we do have one email where a guy is saying, listen, pay to play is illegal, and you all are doing it.
So to the extent that there are some lines. Pay to play is a clear line, and according to this one email, it was potentially being crossed.
Emily Finra is the regulatory agency that oversees a lot of this stuff. There's also an investigation into First Trust that you all report on. What do we know about that investigation.
Well, we know that the investigation is still ongoing as of right now, and it's been going on for at least a year now that FINRA has been looking into First Trust sales practices. So we don't know that many details, but we do know that there is an investigation. It's been going on for quite some time, and it's a little open ended what will come of the investigation. We know that when it comes to pay to play, FINRA hasn't really they haven't really leavied much fines on other firms.
There's not much precedence for, you know, a press release coming out that FINRA has investigated a company and they found instances of pay to play or instances of winding and dying that cross the line of what they would deem acceptable.
One of the things I noticed about covering First Trust, also besides some of the you know, interesting stories and their sort of relationship, you know, a sort of relationship sales tactics, is that they cover a part of the country that a lot of times gets left behind and not focused on. And I think you mentioned in your story, because I've always found that they really speak to the sort of Midwestern heartland of the country, whereas Black Rock and Vanguard are on the coast kind of And I
think that actually matters. You know, if you're an advisor, you feel like they're just more connected to you, both geographically and spiritually in a way, and I think that works for them to a degree.
I think that's a great point. We have a quote in the story, thanks to Emily's reporting, where someone who I believe is actually from Ohio himself talked about how meaningful it was that first trust will like go to you, they'll pay attention to you, they'll cater you to you, they'll care, they'll care about you. And I think that that sense of caring came through and our reporting first.
Just as far as I can tell, it's like they're not putting lip service into the idea that they like are really interested in what's happening in like exurban Cleveland. They seem to really go to the financial advisors there and help them and like think the work they do is honorable and that's a you know that that's a pretty savvy, savvy move, I think. I think I admire.
That, and Jim Bowen is really boots on the ground. I mean he is going to these various financial advisor conferences around the world and making speeches, and I'm not sure if you would see that with other, you know, CEOs of giant ETF companies going to some conference that you know, maybe only a handful of financial advisors actually watched the panels.
Yet at the same time, you know, he's rarely on TV. I mean, I don't think I've ever seen him on financial TV. I don't see him at the ETF conference like he It seems like he's real more focused on just going right to the advisor in their space rather than doing it through mediums.
So what is he selling, what's in the portfolio and what is performance been like.
Himly so, First Tres has over one hundred ETFs. They have buffer ETFs. One of their biggest funds is a dividend index fund, so they have I think Eric had mentioned they have a lineup of you can call them smart beta funds. They have their buffer funds. They have a handful of actively managed fixed income funds that have outperformed the AG for some time. They also have a crypto fund that did really well in twenty twenty four, outperforming some other crypto funds. So it's kind of a
mixed bag. But you're not going to see a complete like plane Vanilla index tracking fund. Most of the funds have some type of smart indexing tilt to them. When it comes to performance, it's hard to measure, you know, how does one ETF company, how does their performance stack up against the rest of the competition, because as I mentioned, their funds are a little different than what you're going to get from a Vanguard or a black rock or even a you know, an an investco the other firms
at the top of the league table. But when it comes to comparing First Trust performance, the funds were mediocre, pretty middle of the pack when you compare them to their morning star appeers.
Yeah, and this is an important point because if you're an advisor, and you are a fiduciary advisor, you could get into some hot water if you if you bought a first Trust ETF that was fifty basis points more than the Vanguard that did the same thing, that would be odd and I would think you'd get some looks for that. But if you're buying something that has a lot of IP in it. It's an active management, there's
a strategy, it's trying to beat the benchmark. Then it could be the fiduciary move because you're paying for the IP. And I think First Trust case again to their credit. As somebody who covered mutual funds back in the day, you just wouldn't believe how much people used to pay between the loads and the fees. That a First Trust smart beta ETF at fifty five basis points or even seventy is a you know, within range of a fair deal versus what she used to get in some of
these mutual funds. That said, somebody else might go, well, I can get a Vanguard dividend fund for four or five basis points, I don't need that. Well, the First Trust person would say, yeah, but we're we put a lot of secret sauce into the smart beta process in a way that you know, maybe it values certain stocks and this and that, and that secret sauce is how much is that worth? Well, that's what people are struggling
with right now in the ETF space. Capital Group, all these legacy asset manager coming into the ETF space, which I call the terrodome because it's so brutal trying to figure out how can I sell this thing when everything's free?
It's not easy.
And so First Trust, in my opinion, has found a viable road in selling IP and you know, doing a lot of relationship management with it, keeping in touch with the advisor, being nice to them. And so we have studied them because honestly, they're like, they're a model, I guess of one way to fight the Vanguard effect. And when we write on the Bloomberg terminal, you know a
lot of our clients are scared of Vanguard. Let's just be it's you know, it's it's like Amazon coming to your little town, you know, when you're a retail shop, Like, how can I, Oh, here's this shop that actually is still successful and profitable?
How to do it?
So to me, First Trust has always been at least somewhat of a model for how to you know, live and survive and even thrive in the Vanguard era.
Is Pterodoma reference to the third Mad Max with That's Thunderdome.
I know the Terodome reference is in you.
It's around the same year, Oh public Enemy, thank you.
Yes. If you look at the lyrics of that song, it's that's what you feel when you launch an ETF.
This is the first time in exchange traded fund and public enemy were mentioned in the same minute.
Okay, Emily, I want to bring it back to some of the other reporting that you have in this story, because there's some interesting details that came out of divorce proceedings as well that really show how the company First Trust goes about entertaining right and that is the thing that has they've attempted to distinguish their business model with.
So when you think about all of this and how they go about doing it, what are some of the things that stick out to you and how we'll First Trust likely continue to distinguish itself in the marketplace.
This is a company that really puts an emphasis on the entertaining of these financial advisors. And there was an email that we uncovered where the wholesaler said, we're expected to entertain. The company was built on entertaining. It was and still is the leg up on our competition. So that is really where they stand out.
You know that reminds you family, we have all these details in the story that are I think pretty fun and pretty eye catching. Forty eight hundred dollars from as scarves. It was it seventy thousand bucks, Emily at like a rich Carlton in Florida, you know, the three hundred dollars hockey tickets and three hundred bucks on top. It reminds me that we're living in this current moment right now where I think there's a really big open question about the rules of the road for businesses right which is
a nice way of saying regulation. And the way is that those rules are going to be rolled back, which is a regular way of saying deregulation. And I think there's a world where a lot of the moors and the standards that guide how we operate in professional corporate America, a lot of those rules could potentially be changing, and some of those rules might be changing drastically, which it.
Makes this little hazy gray area all the more interesting. So, Emily Max, thanks for joining us on trillions.
Thank you so much, love it, thank you.
Thanks for listening to Trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify, or wherever else you'd.
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I'm at Joel Webbers Show, he's at Eric Caulchewness. This episode of Trillions was produced by Magnus Hendrickson.
Bye.