Why should financial advisors get involved with ETFs?
South African retail investors have yet to significantly embrace ETFs. This represents an opportunity for financial advisors, who are best suited to introduce ETFs and their advantages to investors.
In Europe and the UK, where ETFs lack enablers such as ETF distribution platforms, around 90% of ETF users are institutions and professional investors. In constrast, in the US, where ETF distribution platforms are active, retail investors account for around 50% of the US ETF market.
Local challenges
“A major reason why ETFs do not have a bigger market share among retail investors is the limited awareness of them. Financial advisors dominate the retail investment market and therefor hold the key to effective ETF distribution to the retail investor," says Lance Solms, Direstor: Business Development at itransact. Solms also said that other factors affect the distribution on ETFs such as the limited supply of specialised skills, appropriate IT systems and business processes which specifically cater for the big administration of ETFs.
Adding value
Financial advisors can use ETFs in many ways to add value to their clients’ portfolios that active funds are incapable of achieving, says Roland Rousseau, Director at A-DEX. “Financial advisors can use ETFs based on sectors to improve the diversification and risk-adjusted returns expected from an actively managed fund.
Another exciting development is the availability of ETFs that track the performance of asset classes average investors could not previously get exposure to (eg gold, unlimited offshore exposure through inward listed ETFs etc) . Financial advisors can therefore diversify investor portfolios even further, again something actively managed unit trusts are unable to offer.” remarks Rousseau.
According to Rousseau, financial advisors are also using ETFs in a core holding to ‘hedge’ this core with simple capital guarantees. Buying portfolio insurance for an actively managed unit trust is complicated and expensive and active managers are loathe to declare what they are holding. Buying insurance on a liquid ETF core holding is much quicker, more transparent and cheaper.
Customised risk management
“Most of the innovations that ETFs make possible for financial advisors lie in the ‘customised risk management’ realm. Actively managed unit trusts without any ETFs make risk management and changes to risk profiles cumbersome and costly.
Financial advisors can create significant competitive advantages by offering clients simple, smart, cheap, and most importantly, tailor-made, risk solutions by deploying ETFs in portfolio construction,” says Rousseau.
“Adding value on the risk front instead of the return front will be a big growth area for financial advisors going forward. We have witnessed this in Europe and the UK, where financial advisors create entire modular and customised solutions for their clients, providing much better long-term benefits than actively managed funds on their own can. Forward-thinking financial advisors in South Africa should look into this global trend.”
Tapping into the market
“Platforms which embrace ETFs will enable financial advisors to play a crucial role in the development of the fast growing ETF industry, by offering them ways to tap into effective ETF product distribution and awareness,” says Solms.
“This will equip them to market ETFs, together with the appropriate level of advice, to clients who seek to complement their existing investment strategies with passively managed investment products such as ETFs.”
