The Retail Distribution Review (RDR) will not change independent financial advisers'(IFAs) reluctance to use ETFs because they do not fully understand how they work, says the head of an industry body for advisers.
"I think there are two issues for most IFAs with using ETFs. The first one is that most IFAs work on a commission basis and ETFs are not structured to pay commission to advisers," says Paul Stanfield chief executive of the Federation of European Independent Financial Advisers (FEIFA).
"Secondly there is far greater complexity to ETFs -particularly synthetic ETFs - than perhaps was originally realised. I think a lot of IFAs have realised that and I'm not sure how comfortable they are with the true workings of the structure."
With the RDR due to be implemented from the start of 2013, advisers will have to be prepared to advise on all financial instruments, including ETFs, if they wish to maintain their status as independent advisers. The use of commission will be banned and up-front fees will have to be agreed between the adviser and their clients.
Many in the industry say this should provide a boon for ETFs; Stanfield is less certain. "Even if the remuneration aspect was unimportant because advisers are working on a fee basis (such as they will in the UK post RDR) you still have the complexity issue. At this point in time I'm not sure how comfortable advisers are with what is under the bonnet of some ETFs, they are not necessarily straight-forward. I don't necessarily see an increase in the use of ETFs by IFAs directly after RDR."
He does concede that there could be greater indirect retail use of ETFs. "There may be greater use of ETFs for clients of IFAs who use discretionary managers and multi-asset funds."
One move which may boost the direct use of ETFs by IFAs is the growth in ETFs on retail platforms, says Stanfield. "With most platforms the IFA takes their commission from the platform so it becomes immaterial whether the underlying asset or collective generates commission."
"We still have the complexity issue but if you increase the ease of access to the adviser they are more likely to spend the time to do the work and the research they feel is necessary to make recommendations... Any investment aimed at the retail market in the UK needs to be easily accessible through platforms if it wants to do a significant level of business."
There have been mutterings from various corners of the market about the RDR spurring similar initiatives in other European jurisdictions. The Netherlands announced earlier this year that from January 2013 it is also banning commission. But even if there are similar rules introduced across Europe, they will not have as great an effect as in the UK, where the IFA sector is much larger than on the continent.
Partner Insight: Cathi Harrison, director of para-sols and Apricity and Clare Farrell managing director at Northfield Wealth met in London recently to discuss how to stay on top of regulatory risk.
CEO labels whistle-blower as 'brave'
Adds up to £130m FUM
Our weekly heads-up for advisers
Think tank report