Speaking to ifa, ETF Consulting principal Tim Bradbury said that failing to consider low-cost products can come back to haunt advisers if a client lodges a complaint down the track, elaborating on comments he made at a recent Netwealth/Pathway Licensee Services professional development day.
“The ETF and the passive [product] has to become part of the investment advice discussion, otherwise advisers are going to leave themselves exposed,” said Mr Bradbury.
“If it all goes wrong at some point and the relationship goes down the legal path, the client will ask: ‘Why were these low-cost passive solutions not considered for the client’s portfolio?’,” he said.
“The best interests test says: are these investments right for the client? And if cost is a big issue – and it should be a consideration – passive [investments] are becoming increasingly recognised.”
The biggest users of ETFs at the moment tend to be IFAs and boutique practices – primarily because they have more control over the way their businesses are run and more flexibility when it comes to platform selection – said Mr Bradbury.
“Boutiques also tend to use more managed account offerings, with the ownership in the hands of the investor. This lends them to buying and selling [products] on exchange,” he said.
ETFs can also be used by advisers to rebalance a portfolio, to control costs related to the delivery of advice, to manage key compliance requirements, to make advice more scalable and to improve business margins.
Passive investments also fit in well with a fee-for-service business model, said Mr Bradbury, adding that he has seen a high correlation between advisers recommending ETFs and charging a fee for service.
Using ETFs within a business can also help with succession planning and maintaining the valuation of a practice, he said.
Keeping the fees a client has to pay out of their portfolio as low as possible will make it easier to retain them, which will make the business “as saleable as possible in three, five or 10 years’ time”.
It is “human nature” for financial advisers to begin their investment process by thinking ‘I have to pick all the good active managers’, Mr Bradbury said.
“But then we’ll look back in five to 10 years and say: We all thought that was the way of the world, but we realise now that with the benefit of time, that was a flawed process,” he said.
ETFs can still be used ‘actively’ in the satellite portion of a portfolio, with the adviser tweaking the clients’ exposures depending on market conditions, he added.
We use ETF’s mainly for trimming AA and tactical AA tilts. Otherwise active (equities and FI). Reason being as GFC mark II is due sometime between next week and 2025 I want active predominantly.
Good returns will come from what you DON’T own as much as what you do.
Overpriced cap weighted ETF’s don’t appeal at the moment (yes I know there are others) but am I the most skilled individual on the planet to measure and then act to relative changes in valuation, probably not?
In relation to the chipping between advisers you should NEVER be afraid to innovate but you should also not change for changes sake. You should also stick to what you are good at, not just the latest fad.
Remember too Grandma was always right – ‘if you pay peanuts you get monkeys, no such thing as free lunch, if sounds too good to be true it probably is’.
Not surprisingly, a balanced view is probably warranted.
Lots of assumptions there Steve
I’ve been using ETFs in tailored portfolios for clients for years. I’m just a little weary of the gadget junkies and product floggers that condescendingly think their way is the only way to do things. It also never ceases to amaze me how quick advisers are to tear down their colleagues who might have a different view. Leave that to the Industry Funds
Aaahhh. The ETF debate. It always polarises views in financial services and advice models. The take-away I wanted to get across is that passive should become a bigger consideration for portfolios by advisers. This doesn’t mean that it has to be all passive but the benefits are clear for both advisers and importantly clients. No need to be scared of investment innovation. 12 years ago we built portfolios for clients comprising a Balanced fund or 3 from a single manager (maybe in a master trust structure). But times have changed (and will continue to).
Yeah PB much better to do it your way via overpriced managed funds, outsourcing your responsibility so you can focus on your business rather than your clients best interest. It’s not all about etf’s but You clearly don’t get it & never will I’m guessing. I won’t waste my time on you. Keep playing your Walkman.
That simple hey Steve?
Just whack em all into ETFs! Because you have to be really skilled to buy an index fund on market. Sounds like product flogging all over again.
I hand my FSG to my client/prospect at the commencement of my interaction. My FSG clearly states that I am licensed to talk about ABC but not XYZ, and ETF’s fit into the XYZ basket, then I am covered. Am I not? You cannot to walk into a Holden dealership and drive out with a new Ford.
Managed funds and high cost platforms are so 90’s. Why is it those who are unskilled in etf’s or those who offer these old tech options feel threatened by the future which is etf’s?
You’ve gotta love the way the purveyors of various vested interests are using best interest to try and scare advisers into their product. Clients can attempt to sue for anything. Whether they succeed is an entirely different matter.
Why are all the articles promoting how wonderful ETFs are only written by providers of these products or “Consultants” such as this. Fees are not everything as we well know from the the Industry Super propaganda. After 26 years in the the Financial Planning profession I am still not convinced that so called low cost passive options including both managed funds and ETFs provide a better after fees return to clients than well managed active funds. The Best Interest Duty does not revolve around cost!!