Self managed super fund (SMSF) investors are the first to have embraced the nascent exchange-traded fund (ETF) market in Australia. Planners have been slow to come to the table, largely due to the fact that ETFs do not generate a sales commission; however, providers claim the trend towards fee-based advice is driving growth in take-up.
“Trails were an inhibitor to the growth of ETFs in [the planning] market before, but because we’re seeing quite a few financial planners move to fee-for-service platforms, it gives them the ability to use ETFs more,” says Susan Darroch, head of the global structured products group at State Street Global Advisors (SSgA).
Tim Bradbury, co-head of iShares Australia, says private wealth firms, private banks and independent financial advisers are showing the greatest interest. “People who are independent financial planners and/or private client advisers tend to be more comfortable dealing in ASX or listed securities; they tend to want to build a portfolio that isn’t built in the way a mainstream adviser builds a portfolio,” he says. “They tap into new ideas more readily, they tap into listed securities more readily and they want to get offshore with more control and more flexibility.”
ETFs were first launched in Australia by State Street in 2001 and Barclays Global Investors (BGI) followed suit in October last year, launching the first ETFs available to Australian investors that track international indexes. According to BGI, almost half the number of Australians who invest in iShares are SMSF investors, making SMSFs the biggest customer group in the country to adopt iShares.
“About 54 per cent of the people on our register are designated as an SMSF,” Bradbury says. “We think the iShare meets the needs of a lot of people building an SMSF; we think it meets the needs of people whether they’re self-directed or advised. If they’re financial advisers who are running their own licence, they often specialise in SMSFs; it seems to be a natural fit.”
Robert Dunn, director of the Wealth Partnership (TWP), has only recently begun recommending international ETFs to his SMSF clients. “We started a project 18 months ago in anticipation that the market was going to do what it’s now done,” he says. “When the market did pull back and we started to look at a decade of single digit returns, we expected clients to focus on cost.”
In this bearish environment, Dunn says the firm is looking to give a higher allocation to alternative strategies than it might otherwise have done. “We think that’s the only area that will be available for higher returns,” he says. “The local market for ETFs is fairly immature… but if you go to the international market there are lots of them and you can get very sector specific. You can get a global infrastructure ETF or emerging market ETF so you can do a lot of the alternate strategy allocation using these ETFs.”
John Kimber, private client adviser at Ord Minnett, believes the trend towards ETFs is being driven by the SMSF clients themselves, rather than their advisers. “It’s probably the clients [driving the trend] first and then the independent planners who are actively recommending them,” he says. “The dealer groups find difficulty with them for commercial reasons. The tail always wags the dog, that’s the problem, particularly in our industry.”
However, more planners are coming around to the benefits of using ETFs, Kimber adds. “ETFs are a very low-cost, tax-efficient way of gaining access to liquid markets and are a direct alternative to investing in foreign mutual funds that are offered locally,” he says. “Planners use them because it’s a way that they can regain control of the asset allocation in the portfolios that they’re recommending. They can achieve a better, more accurate result for their clients without the style drift costs and tax issues associated with international managed funds.”
Darroch believes it’s the low fees that most appeal to retail investors like SMSFs. “Because it’s an index fund, it gives you a much better tax result because it’s got lower turnover than an active fund, so less realisation of capital gains,” she says. “It’s a very economical way for retail investors to get the broad index exposure.”
