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ETFs Guiding The Way On Objective-Led Investing

  • By Jason Stockwell

As advisers focus on their clients ’ objectives, the ease, price, and transparency of ETFs are helping them build new investment strategies


Cost-conscious clients are increasingly driving the direction of advisers’ investment strategies towards ETFs and a greater focus on ‘objective-led’ investing. Fees have been of paramount importance to the regulator and to clients, who want returns at a fair, and low, price. While the virtues of active fund management are well known, advisers often want to minimise the time they spend on fund research and due diligence when researching the ins and outs of every fund. Clients too are keen to hear how they might invest in markets that they may not otherwise have had exposure to.

This is where ETFs are coming into their own as they are offering greater diversity of investment choice and at a decent price. Howie Li, Head of ETFs at Legal & General Investment Management (LGIM), says fee pressure is ‘felt across the board’.

‘It’s about recognising that this is what investors want, they want lower cost investing,’ he says.

He adds that ETFs, passive funds, and active funds are all investment tools that provide advisers with a very wide choice – a spectrum of knowledge and research to fuel their asset allocation decisions. ETFs are ‘attractive’ for providing low-cost asset allocation solutions that reflect the movement of the underlying market. Advisers are using ETFs ‘flexibly’ and ‘interchangeably’ and as a ‘flexible investment tool’, says Li.

Tony Catt, Compliance Officer at TC Compliance Services, says ETFs often allow advisers to ‘go into markets they wouldn’t research themselves’.

‘Advisers increasingly look to outsource the management of clients’ investments. It’s useful having those funds going into various approaches as ultimately they’re looking for a diversified portfolio. More and more advisers are considering – and using – the passive approach, mainly driven by costs, but it’s also a consistency of performance that appeals too.’

He adds that whilst active managers ‘can produce great things but can also underperform significantly, the ETF will tootle along with the market’.

‘There’s consistency and reassurance that you won’t be miles away from what’s being quoted in the market,’ says Catt.

While ETFs have undeniably shaken-up the investment landscape, Christine Cantrell, Director of ETF sales at BMO Global Asset Management, says that more change is around the corner.

Objective-Led Portfolios

‘I think the evolution to come is on the growing emphasis f objective-led portfolios,’ she says. ‘This comes back to the wealth managers constructing the portfolios, on the basis of what is the end-client’s objective.’

Testament to the concept of the ‘objective-led’ portfolio is the 33% rise in non-market-capped weighted indices, says Cantrell, showing that factor-based indices are growing as ‘they’re delivering on objectives’.

‘Advisers can still choose active managers for small parts of their clients’ portfolios when they’re delivering specific needs but they will want to keep them at a minimum if they’re looking to control costs and for the rest of their portfolios, turn to low-cost solutions,’ she adds.

She says BMO has focused on objectives with an income-focused range that took into account ‘the criteria an active manager would look at in stocks for income’.

‘You can construct a sensible approach even if on a day-to-day basis it’s not being managed by a human, although a human put the rules and criteria in to deliver on a certain objective,’ says Cantrell.

While cost is a factor, for Catt, the appeal of ETFs is the more understandable labelling of the funds which provides ‘more confidence about choosing it and not having an overlap with another’. He believes this enables advisers to build a stronger portfolio ‘as you understand what’s under the bonnet’.

‘It makes it easier from a compliance point of view,’ he says. ‘If you’re looking at a portfolio that’s meant to generate income or is aiming for growth, you can see where the risk rating is going to be as you can see quite accurately what you’re buying. To me, ETFs have an advantage as I think they would be more buy-and-hold focused rather than carrying out lots of transactions to maintain their closeness to the index, so that cuts down the cost.’

However, not everyone is completely committed to ETFs and Jeannette Cottrell, a Chartered Wealth Manager at Tilney Investment Management, says she uses ETFs in ‘specific markets’.

‘My firm belief is in adding value for clients so we use mutual funds that are active manager-led,’ she says. ‘The majority of funds we look at are actively managed. We see ETFs as a growing market, especially now that clients are more cost conscious, but it doesn’t make up the majority of our business.’

The Shifting Landscape Of Advice

The growth in online advice is changing the landscape of investing and fuelling the popularity of ETFs.

Li says there are investors who have ‘disposable income’ that they want to invest but do not meet the minimum requirements, or do not want to pay for, a bespoke financial planning or wealth management service.

‘Digital solutions offer low-cost management of money,’ he says, adding that wealth managers are looking at different options to ‘provide efficient ways to allocate assets’.

‘What’s interesting is what these funds are using for asset allocation are often ETFs. That’s to do with it being data driven – you can make a real-time transaction,’ said Li.

What About Platforms?

Investment platforms are seeing the need to expand their universe to include ETFs even though the take-up may have been a bit later than anticipated.

Cantrell says that in the UK ‘everyone expected the use of ETFs to take off after the retail distribution review (RDR)’ but it is now ‘obvious’ that the ‘main hurdle was with platforms as they were mainly structured to deal with mutual funds’.

‘Now more platforms are tech savvy’ she says, and giving a level playing field to access ETFs. ‘This is a huge turning point across the UK.’

There has been a huge shake-up in the way funds are structured, to the use of technology, and of investment costs. All these have combined to ensure ETFs are much more in advisers’ – and investors’ minds.

Cantrell says there has been a change in the ‘structure’ around funds and technology that has provided greater access and transparency.

‘ETFs take many of the characteristics of regular diversified funds and are making them more accessible.’

There has been a huge shake-up n the way funds are structured, to the use of technology, and of investment costs. All these have combined to ensure ETFs are much more in advisers’ – and investors’ minds.

The second change is around cost, and while Cantrell says there has been a ‘lot of fear-mongering’ on the active versus passive debate, the main question is ‘will it benefit the end investor if the costs are reduced?’

‘If you can access a lot of new strategies or get more efficient access to different asset classes, that can benefit the investor,’ she says.

‘We’ve done a lot of studies and had communications with IFAs to help steer our product development across the board. We have noticed a huge uptake in using a passive approach as the underlying model, but when we probed further and asked IFAs why they were tending to choose those models, it was down to cost.’

Increased automation and the subsequent use of ETFs to build asset allocation models will help advisers to focus on delivering more ‘objective-led’ advice.

‘What IFAs have been good at building is strong client relationships where they clearly understand their client’s goals. This extends to discussing with clients how these solutions can help to send the kids to university or be mortgage-free,’ says Li.

What About The Regulator?

The strong focus on meeting clients’ objectives is also a key driver for the Financial Conduct Authority (FCA).

Catt says the ‘FCA is very much focused on client outcomes, with that comes ensuring the comfort of the client to knowing what they’re investing in and why’.

‘The onus is on the adviser to find out what the client’s objectives are and then to build an appropriate portfolio to maximise the potential of achieving those objectives,’ he says.

‘The fact that ETFs make it clear about what you’re buying and the charging structures being more transparent are positive things for the regulator.’

On a side matter, he adds that MiFID II is actually bringing European advisers up to the levels of those in the UK, where we have ‘always had KIID documents’ and so in this respect the impact on advisers here has been less.

‘We had the RDR in 2013 and that was our MiFID II really,’ says Catt. ‘ETFs are well-placed to be part of everyone’s strategy in the future because of the transparency they provide which is right in line with what the regulators are looking for.’

ETFs also tick another box for the regulator, which has become increasingly cost conscious when it comes to fund selection.

Cantrell says a 2017 FCA market study was about ‘value for money in terms of how much [funds] cost’ that ‘really honed in on the compounding effect of high underlying investment fees’.

She says the study ‘ousted a lot of closet trackers’, ie active funds which hug a particular index tightly meaning managers are effectively operating a passive strategy but with an active price tag.

As ever, with regulation it is a balancing act between enabling businesses to function effectively and also providing clients with a value for money investment service.

‘There’s a big balancing act as far as the FCA and active managers are concerned,’ says Catt. ‘The FCA wants to see that advisers operate profitably so they continue in the profession. It can be quite a difficult balancing act to achieve value for the client as well as ensuring profitability throughout the chain of advice so that the firm can remain profitable and therefore maintain its ongoing service to its clients for the long term. After all, this is where the real value of a transformational financial planning service happens for clients. Helping advisers to deliver effective, transparent and low cost portfolios for the long term can only boost the chances of this happening.

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