Keeping pace with the ETF revolutionMarch 17, 2014
On March 6, 2014, ETF.com hosted top advisors for their ETF University seminar series in San Francisco, CA. Presentations from Goldman Sachs, MSCI and Deutsche Bank highlighted the opportunities and challenges RIAs and advisors face when choosing ETFs as a tool to meet their client’s objectives. During the last decade, exchange traded funds (ETFs) have evolved from a niche cash management tool used by institutions to a versatile investment vehicle adopted by the advisory and retail markets. Over the past five years, $700B in assets has flowed into exchange traded products as compared to $80B in outflows from traditional mutual funds. Advisors at large industry leading firms like Cetera, LPL Financial, Raymond James and ING are becoming increasingly adamant about utilizing ETFs in their clients’ portfolios.
In many instances, firms are finding themselves in catchup mode because of the explosive growth and adoption of exchange traded products. The operational aspects surrounding the use of these instruments can serve as a bottleneck to growing assets under management (AUM). There are a few key areas of weakness that firms need to address to capitalize on the continued advisor demand for products containing ETFs. Below are some of the potential growth decelerators caused by the ETF revolution and how FDx Advisors and FolioDynamix help clients turn what could be a bottleneck into a competitive advantage:
- Firms lack research resources to cover the ETF landscape which is necessary in order to educate advisors about the risks and payoffs of differentiated exchange traded products. FDx Advisors provides advisory clients with a framework to analyze ETFs and a focus list of products. Advisors must be aware of the factors that affect risk and performance in order to make educated investment decisions for their clients. The universe of beta products is growing more complex resulting in many investors buying products they don’t fully understand.
- There is growing demand for access to ETF strategist and multi-product model portfolios. Assets in ETF strategist portfolios have grown from $0 to over $96B (as of Dec. 31, 2013) in a very short period of time, and it represents one of the fastest growing areas in the financial services industry (51% in 2012 and 40% in 2013), as reported by Morningstar in their ETF Managed Portfolios Landscape Summary. FDx Advisors conducts investment research and provides access to investment models for over 30 approved ETF strategist products to meet advisor demand for ETF investment solutions.
- To keep up with the growth rate of ETF adoption in the financial services industry, firms must employ technological solutions that provide the necessary functionality to execute high volume ETF trades that span across multiple accounts. Firms need the ability to rebalance all accounts in a model ETF portfolio, aggregate the orders and then execute large block trades. The expectation to complete these tasks in a single day with efficiency and accuracy can be daunting and serve as a deterrent to the growth aspirations of many RIAs and asset management programs. FolioDynamix provides a scalable technology platform and overlay management solutions that allow clients to achieve these goals and continue to grow.
In order to keep pace with the ETF revolution firms must adapt their business model to support the continued adoption of exchange traded products. Many industry leading firms like the folks at ETF.com and iShares project that the bulk of the growth in the field lies ahead. This is due to the continued investment in innovative products and infrastructure that support the use, education and accessibility surrounding these investment vehicles. Firms who incorporate ETF research resources, ETF model portfolios and a viable strategy for trading ETFs in bulk will be more likely attract and retain advisors relative to firms that fail to address the explosive growth in the market for exchange traded products.
The ETF revolution is only just beginning. FDx Advisors and FolioDynamix can help you stay ahead of the curve and put the right programs and technology in place to gain a competitive advantage for your wealth management firm. Don’t miss out on the opportunity the growing ETF market offers – contact us today.