Bill Hortz's picture

In this second installment of the Institute’s discussion with Bob Dorsey, Managing Director of Ultimus Fund Solutions, we discussed the trends and the direction of where he sees mutual funds and ETFs going over the next 5-10 years. His perspective as one of the largest, independent mutual fund service providers for RIAs in the country provides a great vantage point


Bill Hortz: “What do you see for innovation in the mutual fund space….what directions do you see this may take and what may we expect in the future?”

Bob Dorsey: “I think what has changed so dramatically is how the investor ultimately invests in mutual funds through professional financial advisors. I’m primarily referring to the RIAs, fee-based advisors or financial advisors who work at the wire-houses charging a fee for managing investments.  Now investors don’t necessarily want to buy investment products, they want to buy investment advice. So the products have had to change over the years to accommodate more of a money management approach. The liquid alternative funds, specialized sector funds and ETFs are all byproducts. They became really great tools for financial advisors to manage their clients’ portfolios, help them get more precise asset allocation and stronger diversification. 

I think you will continue to see fund sponsors building investment products that fill specific needs for the financial advisor community in managing client portfolios to address market volatility, more extensive diversification, and their changing client needs and expectations. In other words, you will continue to see more liquid alternative funds; unconstrained or niche bond funds like catastrophe funds, business development companies (BDCs); newer or lesser used institutional strategies wrapped into fund structures; and other uniquely constructed or active ETF strategies.

Bill Hortz:  “What are the major obstacles towards being more innovative within the mutual funds space?”

Bob Dorsey: “As you know, the mutual fund space is a highly regulated industry not only from the SEC and FINRA perspective but also from the IRS perspective, so you can only innovate up to a certain point. You need rules or regulation changes that allow you to really do some innovation. For instance, the IRS used to have the short-short test and that kept a lot of very active money managers from running some of their strategies in a mutual fund format, because they couldn’t pass the short-short test. When the IRS did away with that in the 1990’s that really started to allow some of these hedge fund managers to be able to utilize some of their investment strategies in mutual funds.

Much of the innovation that is taking place in the mutual fund space is coming from fund sponsors filing for exemptive relief with the SEC so that new kinds of products can be brought to market. That’s how ETFs really came about. Fund sponsors filed for exemptive relief of certain 40-Act requirements and once the SEC granted the exemptive relief, then the industry was able to create the different types of ETF’s that are now available today.

Over the last 2 years, the SEC has received over 300 applications per year for exemptive relief for many different types of matters. It is anticipated that number will continue in 2015 and is also projected for the following year as well. The largest portion of exemptive orders continues to be with Active and Index ETF’s along with an increase in Business Development Companies.

The exemptive relief process has really allowed for the growth of ETFs. Many of the ETFs coming to market now are active ETFs versus passive ETFs. One of the latest versions of active ETFs, NextShares™ by Eaton Vance, launched earlier this year.  This will lead to a number of fund sponsors applying for similar exemptive relief.

I think that while regulation has hindered some innovation, the industry has always welcomed innovation as a result of proactively pushing for rule changes and relief and responded by creating a variety of new products as a result.”

Bill Hortz: “Let me throw out this question - What do you think could be a game-changer that the industry needs to be aware of and plan for?”

Bob Dorsey: “It’s going to definitely be technology-driven. So much of what has changed since I’ve gotten into the industry in the last 30 years has been technology. The technology has been about delivering new products and services, the fund groups got better with technology and as technology evolved they developed better websites with better tools for investors. Schwab changed the game years ago with their OneSource platform of how investors and their advisors accessed mutual funds and they then took that model and used their clearing firm, custody operations and their fund lists to become the back office to help fee-based planners and the independent broker-dealers.

 Going forward there’s technology and innovation that is helping financial advisors as well as competing with current financial advisors. Firms like Motif Investing and Hearsay Social’s Predictive Social Suite for Advisors are now available for financial planners and investors.  In addition many of the mutual fund platforms are creating more dynamically driven model portfolios and the advent of robo-advisors is already upon us.

One final thought that is currently being discussed, and you may have seen some of these articles, but there’s a lot of discussion that firms like Google could ultimately be in the asset management business. They could change the way asset management could be delivered to individuals. Just think about all the analytics, the great technology that Google can deliver and especially new services to the ultimate investor. It could drive new competitive customer engagement strategies we have not seen yet. And the threat is not just Google. Bill, there are firms out there who aren’t yet in the asset management or fund business who will be, and they will change the game just like Schwab and others changed the game 20 years ago.

Bill Hortz: “Thank you so much Bob for your time and giving us some of your views on the industry.”


The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial services firms. We position our members with the necessary ongoing innovation resources and coaching to drive and facilitate their growth, differentiation and unique community engagement strategies. The Institute was launched with the support and foresight of our founding sponsors--Innovation Equity Partners, Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, MeridianIQ/AdviceIQ, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information or to join click here


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