March 13, 2025 • 22 mins
First Trust, the sixth-largest issuer of US exchange-traded funds, has managed to stay mostly under the radar in the investing world — and yet it's also perfected a lucrative, Vanguard-proof business model. The company's products are directed more at financial advisors than the retail world, and their funds, most of which are actively managed, have higher fees than typical index-tracking ETFs. Enter the First Trust sales force, which wields steak dinners, personal coaching, sports tickets and Hermès scarves to win business — practices that have attracted the attention of the Financial Industry Regulatory Authority.
On this episode of Trillions, Eric Balchunas and Joel Weber speak with Bloomberg News reporters Emily Graffeo and Max Abelson about their recent First Trust story, “An All-American Finance Empire Drew Billions—and a Regulator’s Attention,” for Bloomberg Businessweek. They discuss CEO Jim Bowen's approach, how the company has distinguished itself from competitors, and why Finra is investigating the company's sales tactics.
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Speaker 1 (00:05):
Boking on trillions.
Speaker 2 (00:06):
I'm Joel Webber and I'm Eric Belchunis.
Speaker 3 (00:12):
Eric.
Speaker 4 (00:12):
You know something that you know about is steak dinners.
You like to make a lot of bets that involve
steak dinners.
Speaker 1 (00:19):
We have enough whole.
Speaker 4 (00:20):
Episode that is more or less about the steak dinner,
only it's a different type of steak dinner.
Speaker 1 (00:25):
Yeah.
Speaker 2 (00:25):
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
(00:50):
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.
Speaker 4 (01:07):
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,
(01:27):
as well as Max Abelson, a finance reporter here at Bloomberg,
this time on trillions First Trust. Emily, Max, Welcome to Trillions.
Speaker 3 (01:41):
That's an honor to be here.
Speaker 5 (01:42):
Thanks for having us.
Speaker 4 (01:43):
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.
Speaker 5 (01:54):
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.
(02:17):
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
(02:40):
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.
(03:01):
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.
Speaker 4 (03:11):
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.
Speaker 5 (03:25):
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.
Speaker 3 (03:38):
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.
(04:04):
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
(04:24):
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.
Speaker 4 (04:41):
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.
Speaker 5 (04:59):
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
(05:25):
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
(05:46):
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
(06:08):
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
(06:30):
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
(06:51):
about how their I guess distribution model is a little
bit different from these other ETF companies.
Speaker 4 (06:57):
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.
Speaker 2 (07:10):
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.
Speaker 5 (07:31):
Key Erk is pretty famous at these conferences. If you
walk with him at a conference, you can't walk.
Speaker 2 (07:37):
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
(07:57):
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
(08:18):
would get the broker just for the luxury of putting
you in this probably crap fund.
Speaker 1 (08:23):
Handler feet.
Speaker 2 (08:24):
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.
(08:46):
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.
(09:07):
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
(09:28):
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
(09:50):
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.
Speaker 4 (10:18):
Here we are first Trust, we know is wielding steak dinners.
How is that influencing their business strategy?
Speaker 3 (10:24):
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.
Speaker 1 (10:30):
I probably owe you several actually.
Speaker 3 (10:32):
Actually technically you do.
Speaker 1 (10:33):
Omi. Thank you for bringing that up. Okay, you know,
there is.
Speaker 3 (10:36):
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
(10:57):
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
(11:20):
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
(11:42):
the industry calls sort of Emily, what are those great words?
Speaker 1 (11:47):
It can't be neither.
Speaker 5 (11:49):
Extensive, frequent or extensive.
Speaker 3 (11:51):
Can't be too frequent, and it can't be too extensive
and that makes sense.
Speaker 1 (11:54):
Boy, that's a hazy line, though, you know, I.
Speaker 3 (11:56):
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
(12:19):
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
(12:40):
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.
Speaker 4 (12:57):
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.
Speaker 5 (13:09):
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
(13:29):
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
(13:52):
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.
Speaker 2 (14:03):
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
(14:24):
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.
Speaker 3 (14:41):
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.
(15:02):
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.
Speaker 5 (15:22):
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
(15:44):
watched the panels.
Speaker 2 (15:46):
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.
Speaker 1 (16:03):
So what is he selling, what's in the portfolio and
what is performance been like.
Speaker 5 (16:07):
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
(16:30):
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
(16:52):
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
(17:12):
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,
(17:35):
pretty middle of the pack when you compare them to
their morning star appeers.
Speaker 2 (17:39):
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
(18:01):
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
(18:25):
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
(18:46):
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?
Speaker 1 (19:04):
It's not easy.
Speaker 2 (19:05):
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
(19:26):
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?
Speaker 1 (19:41):
How to do it?
Speaker 2 (19:42):
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.
Speaker 3 (19:50):
Is Pterodoma reference to the third Mad Max with That's Thunderdome.
Speaker 2 (19:56):
I know the Terodome reference is in you.
Speaker 1 (19:59):
It's around the same year, Oh public Enemy, thank you.
Speaker 2 (20:03):
Yes. If you look at the lyrics of that song,
it's that's what you feel when you launch an ETF.
Speaker 3 (20:09):
This is the first time in exchange traded fund and
public enemy were mentioned in the same minute.
Speaker 4 (20:18):
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
(20:39):
things that stick out to you and how we'll First
Trust likely continue to distinguish itself in the marketplace.
Speaker 5 (20:48):
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
(21:11):
that is really where they stand out.
Speaker 3 (21:14):
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
(21:36):
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,
(21:58):
a lot of those rules could potentially be changing, and
some of those rules might be changing drastically, which it.
Speaker 4 (22:06):
Makes this little hazy gray area all the more interesting. So,
Emily Max, thanks for joining us on trillions.
Speaker 3 (22:11):
Thank you so much, love it, thank you.
Speaker 4 (22:18):
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.
Speaker 5 (22:27):
Like to listen.
Speaker 1 (22:29):
We'd love to hear from you. We're on Twitter.
Speaker 4 (22:31):
I'm at Joel Webbers Show, he's at Eric Caulchewness. This
episode of Trillions was produced by Magnus Hendrickson.
Speaker 1 (22:39):
Bye.
Boking on trillions.
Speaker 2 (00:06):
I'm Joel Webber and I'm Eric Belchunis.
Speaker 3 (00:12):
Eric.
Speaker 4 (00:12):
You know something that you know about is steak dinners.
You like to make a lot of bets that involve
steak dinners.
Speaker 1 (00:19):
We have enough whole.
Speaker 4 (00:20):
Episode that is more or less about the steak dinner,
only it's a different type of steak dinner.
Speaker 1 (00:25):
Yeah.
Speaker 2 (00:25):
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
(00:50):
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.
Speaker 4 (01:07):
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,
(01:27):
as well as Max Abelson, a finance reporter here at Bloomberg,
this time on trillions First Trust. Emily, Max, Welcome to Trillions.
Speaker 3 (01:41):
That's an honor to be here.
Speaker 5 (01:42):
Thanks for having us.
Speaker 4 (01:43):
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.
Speaker 5 (01:54):
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.
(02:17):
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
(02:40):
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.
(03:01):
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.
Speaker 4 (03:11):
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.
Speaker 5 (03:25):
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.
Speaker 3 (03:38):
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.
(04:04):
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
(04:24):
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.
Speaker 4 (04:41):
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.
Speaker 5 (04:59):
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
(05:25):
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
(05:46):
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
(06:08):
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
(06:30):
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
(06:51):
about how their I guess distribution model is a little
bit different from these other ETF companies.
Speaker 4 (06:57):
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.
Speaker 2 (07:10):
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.
Speaker 5 (07:31):
Key Erk is pretty famous at these conferences. If you
walk with him at a conference, you can't walk.
Speaker 2 (07:37):
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
(07:57):
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
(08:18):
would get the broker just for the luxury of putting
you in this probably crap fund.
Speaker 1 (08:23):
Handler feet.
Speaker 2 (08:24):
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.
(08:46):
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.
(09:07):
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
(09:28):
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
(09:50):
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.
Speaker 4 (10:18):
Here we are first Trust, we know is wielding steak dinners.
How is that influencing their business strategy?
Speaker 3 (10:24):
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.
Speaker 1 (10:30):
I probably owe you several actually.
Speaker 3 (10:32):
Actually technically you do.
Speaker 1 (10:33):
Omi. Thank you for bringing that up. Okay, you know,
there is.
Speaker 3 (10:36):
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
(10:57):
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
(11:20):
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
(11:42):
the industry calls sort of Emily, what are those great words?
Speaker 1 (11:47):
It can't be neither.
Speaker 5 (11:49):
Extensive, frequent or extensive.
Speaker 3 (11:51):
Can't be too frequent, and it can't be too extensive
and that makes sense.
Speaker 1 (11:54):
Boy, that's a hazy line, though, you know, I.
Speaker 3 (11:56):
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
(12:19):
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
(12:40):
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.
Speaker 4 (12:57):
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.
Speaker 5 (13:09):
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
(13:29):
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
(13:52):
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.
Speaker 2 (14:03):
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
(14:24):
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.
Speaker 3 (14:41):
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.
(15:02):
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.
Speaker 5 (15:22):
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
(15:44):
watched the panels.
Speaker 2 (15:46):
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.
Speaker 1 (16:03):
So what is he selling, what's in the portfolio and
what is performance been like.
Speaker 5 (16:07):
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
(16:30):
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
(16:52):
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
(17:12):
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,
(17:35):
pretty middle of the pack when you compare them to
their morning star appeers.
Speaker 2 (17:39):
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
(18:01):
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
(18:25):
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
(18:46):
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?
Speaker 1 (19:04):
It's not easy.
Speaker 2 (19:05):
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
(19:26):
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?
Speaker 1 (19:41):
How to do it?
Speaker 2 (19:42):
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.
Speaker 3 (19:50):
Is Pterodoma reference to the third Mad Max with That's Thunderdome.
Speaker 2 (19:56):
I know the Terodome reference is in you.
Speaker 1 (19:59):
It's around the same year, Oh public Enemy, thank you.
Speaker 2 (20:03):
Yes. If you look at the lyrics of that song,
it's that's what you feel when you launch an ETF.
Speaker 3 (20:09):
This is the first time in exchange traded fund and
public enemy were mentioned in the same minute.
Speaker 4 (20:18):
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
(20:39):
things that stick out to you and how we'll First
Trust likely continue to distinguish itself in the marketplace.
Speaker 5 (20:48):
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
(21:11):
that is really where they stand out.
Speaker 3 (21:14):
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
(21:36):
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,
(21:58):
a lot of those rules could potentially be changing, and
some of those rules might be changing drastically, which it.
Speaker 4 (22:06):
Makes this little hazy gray area all the more interesting. So,
Emily Max, thanks for joining us on trillions.
Speaker 3 (22:11):
Thank you so much, love it, thank you.
Speaker 4 (22:18):
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.
Speaker 5 (22:27):
Like to listen.
Speaker 1 (22:29):
We'd love to hear from you. We're on Twitter.
Speaker 4 (22:31):
I'm at Joel Webbers Show, he's at Eric Caulchewness. This
episode of Trillions was produced by Magnus Hendrickson.
Speaker 1 (22:39):
Bye.
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