Go passive post-FOFA, says consultant
Financial advice firms cannot afford to ignore low-cost passive instruments such as ETFs in the FOFA environment, according to an industry consultant.
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.
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