Nick Blake, head of retail at Vanguard Asset Management, explains why ETFs have still not been widely embraced by the UK adviser community.
Exchange traded funds (ETFs) offer both good and bad news for advisers grappling with the challenge of how to offer value after the Retail Distribution Review (RDR) watershed.
The good news is that, because ETFs tend to be low-cost and commission-free, they are a viable option in an investment world which is increasingly price-sensitive and rejects or prohibits commission. I cannot think of an occasion where anyone has ever paid a penny to an adviser in commission on an ETF, so they are therefore RDR-ready.
The bad news is that many advisers are confused, indifferent or even slightly alarmed by the concept of ETFs. For example, a study by CWC Research recently found that a quarter of UK financial advisers who intend to provide independent advice following RDR did not want non-commission-paying products, such as ETFs or other passive index funds, to be offered on fund platforms at all.
Why do exchange traded funds continue to split opinion?
They also found that the number of advisers using ETFs to reduce portfolio costs had scarcely risen over the past two years.
Elsewhere, a recent Skandia poll of more than 800 advisers revealed that two thirds had little or no understanding of the structure of synthetic ETFs. More than half had little or no comprehension of asset-based ETFs.
There are two possible reasons for this combination of apathy and antipathy. The first is that ETFs are still not a ubiquitous investment tool, so a number of advisers may not encounter them on a regular basis, and consequently assume they are esoteric.
That picture, however, is changing with startling speed. Lipper data shows that ETF AUM in Europe has grown by 600% since 2005, and is now around €240bn.
Bernstein Research, meanwhile, projects a 13% compound annual growth rate for ETFs, projecting the $1.1trn global industry will hit $6trn by 2025.
In addition, platforms, which have been slow to embrace ETFs, are now beginning to warm to them. So blissful ignorance about ETFs may only work as a short-term tactic, like disregarding the fast-approaching train because it is a long way down the track.
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