Adviser Focus: Formulating an ETF Policy for Approved Product Lists | BetaShares

Adviser Focus: Formulating an ETF Policy for Approved Product Lists

BY Vinnie Wadhera | 26 August 2014

We have received a number of requests to post information on our blog that is relevant to financial advisers and professionals. Our Adviser Focus series is a set of posts written specifically for financial advisers and dealer groups, and which aims to deepen the understanding of the adviser market on ETFs and their uses. This post is written by Vinnie Wadhera, BetaShare’s Director of Institutional Business and National Accounts.

In my current role, I am often contacted by financial advisers, dealer group managers and researchers for either suggestions or opinions on points to consider when formulating a policy around approving ETFs for their approved product lists (APLs).  Many of these requests come from clients that acknowledge my previous experience in this area, having been a Head of Research for a large national financial advisory group.

Here are some of the key points that I discuss or present in relation to such requests:

1.     Full Asset Class Coverage

One of the key benefits of ETFs is that they can be used by financial advisers for asset allocation purposes.  With ETFs, it is possible to obtain low cost exposure to an otherwise difficult to access asset class or investment strategy via a single trade on the ASX. In order to construct balanced client portfolios (particularly for those based on direct portfolios) financial advisers will require ETF exposures over all asset classes within their strategic asset allocations. While these will always include the basic allocations (domestic & international equities and fixed income), these should also include (but not be limited to): 

    • Cash
    • Alternatives (including commodities and gold)
    • Smart beta exposures (non-market cap weighted indices)
    • Strategy based (income focussed)

2.     Meeting the needs of SMSFs and self-directed investors

ETF adoption in Australia has been led by SMSF investors. BetaShares has undertaken significant research in this area in conjunction with Investment Trends. One of the key findings of this report was that a relatively low percentage of SMSF and self-directed investors presently rely on an adviser to invest in an ETF. This presents an opportunity for financial advisers to learn about, and become ‘topic experts’ in ETFs. Having available a broad suite of ETFs to recommend to SMSF investors, particularly for portfolio completion or strategy based exposures, will help to ensure that the particular interests of individual clients are met.

3.     Tax Implications

It is important to consider tax implications and tax status for any ETF prior to APL inclusion. For any exchange traded products the tax status, and specifically the ability to hold the investment on capital account (thereby qualifying for CGT discounts) should be verified on an ongoing basis.

4.     Consistency of Approval – Managed Funds vs ETF

Consider a consistent policy of approval for an ETF where an existing managed fund is approved that utilises a similar underlying investment strategy. As an example, we’re finding that dealer groups are approving our BetaShares FTSE RAFI Australia 200 ETF (ASX: QOZ) which utilises a similar investment strategy and approach to some popular unlisted managed funds currently on the market. The availability of the same or similar investment strategy in both a managed fund and an ETF form allows a financial adviser to construct a consistent portfolio across their client segments while being agnostic to the investment tool used.

5.     Preferred ETF Fund Manager Partners

As part of selecting a preferred panel of ETF managers, several dealer groups also deem the following factors as a key determinant:

    • Adviser support and education ie evidence that the manager spends time meeting with advisers, and develops content and materials relevant to adviser practices (e.g. portfolio construction ideas, ETF education and industry insights).
    • Adviser Services Managers / Account Managers are competent in portfolio blending analytics. ie the BDMs that talk to you directly are the ones that will personally collate your portfolio analytics.
    • Product support ie the Manager has attracted inflows and support from advisers. This can be evidenced from market net-inflow data.

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