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ETFs: the solution to the retirement advice gap?

  • By Jason Stockwell

Advisers are looking to ETFs to help clients build retirement savings and ETFs are adapting to help solve this pressing issue


The simplicity and low-cost nature of ETFs are helping to fill the advice gap and ensure more investors build sufficient funds for retirement. Pensions are no longer seen as sufficient to fund increasingly long retirements and advisers are having to look elsewhere to ensure clients have enough put away in long-term savings.

Howie Li, Head of ETFs at Legal & General Investment Management (LGIM), says wealth management firms are roviding clients with scalable retirement solutions and increasingly using ETFs that can address the advice gap.

‘ETFs are the building blocks for asset allocators,’ he says. ‘ETFs can help fill the advice gap’.

He says that some businesses can provide advice ‘for less than 1%’ as ‘they’re providing a digital interface can interpret a client’s objectives and risk appetite to then come up with a solution within a range of portfolios made up of ETFs.’

‘Digital rob-advice is a slow-growing area but it addresses the advice gap as it’s designed to be scalable and electronic,’ he says.

‘With the increased in use of technology and how we consume things, people will do it on their phones, laptops and tablets. It’s interesting to see traditional models try to evolve. I was speaking to a wealth management company which is trying to transition, they say the feedback from investors has been that they want to be provided with lower cost solutions and they’ve heard that ETFs are efficient. They’re transitioning the business model in response to customers. That’s driving the business to become more digital and as the scalability increases, it will help address the advice gap.’

Savvy Investors

The popularity of ETFs for retirement investing – and investing generally – has grown as investors’ understanding of their finances has also grown.

‘I think investors are savvier than they were a long time ago,’ says Jeannette Cottrell, a Chartered Wealth Manager at Tilney Investment Management.

‘Theme-driven investing is big now. ETFs should be the basis for easy access to a specific market, there’s a place for ETFs in thematic investing [as] managers can bring out products quickly.’

Christine Cantrell, Director of ETF sales at BMO Global Asset Management, agrees that product providers are turning around funds much more quickly and there is ‘more innovation and new concepts being launched in ETF wrappers’.

‘There’s more focus and investment in providing these solutions,’ she says. ‘I believe it’s because of the economies of scale, and the ETF gets to be more efficient as you’re outsourcing some of the cashflow management to the exchange. You can focus on strategy, you can bring out something quite quickly.’

This innovation will continue as investors increasingly use ETFs for long-term allocation plays.

‘ETFs will continue to bring innovative solutions,’ says Li. ‘We see many investors who use them for long-term strategic asset allocation. An ETF is interchangeable with a traditional unlisted mutual fund.’

Lifting The Lid

Li adds that what is exciting about long term thematic investing using ETFs is that they are ‘not just trying to give exposure to the largest companies within an index but instead they can provide instead they can provide exposure to non-traditional themes. We’ve got a robotics fund, a cybersecurity fund and e-commerce for example. These don’t sound traditional as they are about identifying long term themes that are taking place because how we live is changing and a shift is happening,’ he says.

‘The key is identifying the companies involved in the change, which companies are developing the tech, and which companies are integrating this kind of thinking into their business.’

In order to identify the companies that will benefit most from thematic change, LGIM works with ‘dedicated experts in those areas’ to identify the companies driving the change and understand ‘how the theme is changing how we live and work.’

‘We spend a lot of time researching these companies…the data is hugely relevant to developing a unique investment strategy as well as identifying the companies that are key,’ says Li.

Pensions are no longer seen as sufficient to fund increasingly long retirements and advisers are having to look elsewhere to ensure clients have enough put away in long-term savings.

Li maintains that ETFs are no different from mutual funds as ‘ETFs are a wrapper’, they just ‘happen to be exchange-traded so you can see real price transparency’ and managed to track an investment strategy.’

Although the history of ETFs is shorter than that of active mutual funds, Li says their strategies are ‘maturing and we’re seeing developments, where techniques previously employed by discretionary fund managers for specific outcomes are being deployed into an index in a transparent mannerfor consistency.’

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