Increased scrutiny of the cost of delivering advice is encouraging more financial planners to explore low-cost investment implementation options, in a bid to retain a greater slice of the overall margin.
Tim Bradbury, head of client coverage for MSCI in Australia, says there is evidence of this in the continued strong net new asset growth of the exchange-traded fund (ETF) market.
But advisers who successfully create low-cost, passive investment propositions need to leave behind the “traditional” mindset that it’s an adviser’s job to be able to pick the best managers or stocks.
This week the global analytics firm Cerulli Associates released a report showing that institutional investors are increasingly using certain types of ETFs to replace active strategies. The firm said institutions that were “unhappy with the results from their active managers began seeking alternative approaches to risk-adjusted returns as part of the fallout from the financial crisis”.
“A number of institutional players started investing in strategic beta ETFs as part of this shift.”
And yesterday Van Eck Global revealed that an ETF focusing on small-capitalisation dividend-paying stocks had attracted $25 million of funds in “its first few days of trading following buying for their managed accounts by the specialist ETF strategist Implemented Portfolios”.
Bradbury says advisers are gaining a deeper understanding of how ETFs work and how they can profitably be incorporated into an advice proposition.
“There’s focus on the overall cost of delivery of advice…which is [across] investment, advice and admin, or platform,” Bradbury says.
“That’s been coming down – partly it’s been coming down because there’s been more ETF and passive inclusion, but there’s also cost coming down across the platform and administration space.
“If the adviser owns the client relationship and sits closest to the client, they deserve to retain a fair chink of that margin. That’s only logical.
“If they can get comfortable about the product [aspect] of an ETF, and they can get comfortable about how to use it in their practice, and they get comfortable about how to weave it into whatever they’re doing, that’s when it starts to become real.”
Basic drivers unchanged
Bradbury says the basic reasons that financial planners and advisers use ETFs and other low-cost passive investment options remain largely unchanged: low cost, transparency, flexibility, no desire to pick the active managers, and wanting to blend active and passive management in portfolios.
“All those still hold true,” he says.
“And the education is just getting deeper into the business models.”
But Bradbury says there’s more to adopting ETFs than “just saying here’s a set of tools, good luck using them”.
“There’s a whole range of things that need to get embedded in an adviser’s business or mindset to be able to start using them and using them comfortably,” he says.
“First off they’ve got to be understand what the ETF is and how it works and how it differs [from alternatives]. They work out what it is and it doesn’t have any application to their practice until they work out whether they can talk about beta or passive [investment] to their clients. If they’ve spent years saying we’re the guys and girls who can pick the active managers, that can be quite confronting.
“If the dominant practice is to try to pick a range of complementary active managers across a range of asset classes to build a set of multi-asset-class portfolios [then] traditionally the passive idea has been seen as not delivering value or [driven by] not being able to identify enough of the good active managers.
“I think the advice market has got a lot better in the last few years in recognising that if you get asset allocation right that will drive the return of the portfolio. And then, how do you do that with active and passive is a second-order question.”
Not changing the whole business model
Bradbury says advisers are increasingly realising that “it’s not about changing your whole business model – far from it – it’s more about how do you use new and probably better pieces of information and technology to build your business to position it to go forward.”
Bradbury says that in one way or another MSCI deals with “almost all the ETF issuers … around the equity indicies that sit underneath the ETF”.
“The trend that’s continuing to drive these high levels of growth in net new asset flow is not only new advisers putting their toe in the water,” he says.
“Advisers who have been there for a couple of years and have done maybe one or two ETF trades for a handful of clients are now stepping it up whereby they’re doing the same one or two trades across 30, 40 or 50 clients; or they’re doing another trade for everybody.”
