In my role as Director, Adviser Services, I get to see first-hand how different advisers approach their practices and attempt to differentiate their client value proposition. Obviously, when looking to develop a differentiated practice offering, there is a plethora of choice and no right answer. But one thing I have found in common amongst the more successful practices I visit, is a desire to stay on top of innovation and changing client behaviours. Many advisers I talk to are looking to be proactive with their clients and be at the forefront of change. By being early adopters they can keep ahead of clients who are becoming more educated in financial and investment markets and attract new clients by staying ahead of the pack. From my vantage point, I am seeing this occurring with the growing interest we see amongst advisers wanting to understand the ETF market.
There is no doubt that since the GFC, clients have been looking for lower cost, more transparency and liquidity in their investment options – ETFs fit this bill! The recent BetaShares/Investment Trends ETF report found that the number of ETF investors surged by 50% in 12 months to November 2013 with SMSFs remaining the key driver of industry growth.
Corresponding with the general growth of ETFs, adviser use of ETFs has also grown – from 28% to 33% of advisers at end 2013, the highest level to date. What I found interesting about the statistics is that while the number of advisers using ETFs has been growing, client usage of advisers for their ETF investments has not. The percentage of investors who said that their adviser played a key role in their ETF investment remained the same as last year’s figure; 26%.
The fact that the majority of ETF investors are still not using advisers, coupled with the very strong growth in the number of ETF investors means that there is a great opportunity for advisers to get involved in their client’s ETF investment decisions. It appears that there is an “advice gap” that can be filled by those advisers willing to embrace the benefits of ETFs and offer advice on solutions that clients are otherwise seeking by themselves.
With this in mind, one of the key things our Adviser Services team helps advisers to do is to assist them in understanding how ETFs can be integrated in their practices.
For example, we consult with advisers interested in ETFs about what outcomes they are looking to achieve in their client portfolios. What is their investment philosophy, their client base demographics? Do they believe in active or passive management or a mixture of both? Do they use direct equities, hybrids, managed funds? Is the asset allocation strategic or are there tactical and dynamic asset allocation decisions being made? How often do they rebalance client’s portfolios and what is the client review frequency? Are investments held on platform(s), direct, under SMA, IMA, UMA structures, or via model or bespoke portfolios?
Having such a discussion helps us to take a consultative approach to our discussions with advisers. We can also then run portfolio analytical models to provide advisers with tangible thoughts on how to achieve their portfolio construction outcomes for their clients. This gives advisers an investment framework that can help them build a unique value proposition to offer clients and prospective clients. Working with advisers in this fashion, we find that practices of all shapes, sizes and persuasions can integrate ETFs.
A real-life example
It is perhaps best to explain some of this by reference to a specific example of the type of work we do:
One of my adviser clients uses an absolute return focus in their client portfolios. They were interested in using ETFs, with their key concern being that the existing total portfolio MER was quite high. As such, the aim was to see if we could achieve a similar or better result by adding some ETFs into the model. In discussions we reviewed the role of each manager in the portfolio and by allocating a % of the portfolio to one of our broad Australian ETFs, a High Yield Fund and our cash ETF we were able to maintain the return of the portfolio, keep the absolute return focus exposure but, importantly, reduce the portfolio cost and the lower the overall standard deviation (volatility).
The end-client benefits were a better risk/return outcome for a significantly lower cost (not to mention increased liquidity and transparency!). By adopting ETFs, the adviser benefited from achieving a better outcome for clients and also by adding ETFs to their value proposition they were seen to be proactively looking at all options in the investment market. This added a real ‘value add’ component to their client discussions which would not be available had they not embraced ETFs.
We’d encourage any adviser with an interest in adopting ETFs in their practice to contact our Adviser Services team to commence a discussion about how you might be able to integrate these powerful investment tools into your business.