Lee Jones reports that the RDR and wider availability through fund supermarkets are set to increase ETF business
Blackrock global head of ETF research and implementation strategy Deborah Fuhr believes ETFs will certainly gain popularity after 2012 due to the RDR. She says: “Many advisers are not even looking at ETFs today because they are tied or multi-tied but the RDR is definitely encouraging advisers to consider ETFs because it says that if they want to become independent they have to look at the whole market.
“IFAs will have to be able to demonstrate why and explain themselves if they sell a structured product with the same returns but a higher fee than an ETF, so the RDR will have a very significant impact on the use of ETFs in that channel.”
The fact that ETFs do not pay any commission to financial advisers is often cited as a reason why ETFs do not have a bigger share of the UK retail market. The products have been around in the US for a similar length of time as the UK but have proved far more popular there.
upporters of ETFs say they flourish in a fee-based environment where platforms offer full ETF access.
Db x-trackers head Manooj Mistry says: “The US market is about seven years old and we are seeing a lot of US advisers using ETFs in their clients’ portfolios.”
The US has the biggest ETF market in the world. According to the National Stock Exchange, US ETFs had $752bn (£496bn) in assets in November 2009. In comparison, there are $220bn (£145bn) of assets within ETFs in the whole of Europe.
But Evolve Financial Planning managing director Anthony Williams considers the issue has never been about commission for advisers.
He says: “It is about picking funds that add value to the client’s portfolio. With ETFs, you might decide that you offer value by tracking the index and giving the client the market return while concentrating on their wider financial planning. Ultimately, it is about the style of the investment approach rather than a question of commission.”
Novia head of marketing Martin Broomfield says: “The RDR is all about choice. I would say there will be more advisers looking at ETFs after 2012 but it depends on their availability.”
The lack of availability is often cited as another reason why ETFs have failed to capture a significant share of the retail investment market.
iShares senior business development officer Julian Hince says the lack of an ETF presence through fund supermarket has hampered the sector growth.
He says: “We have to look at why ETFs have not been advised on and I think that lack of commission has obviously been an issue but there is a lack of education and it has been a lack of access.”
Mistry says: “The Americans have a system called ’off the wrap accounts’ where they can mix ETFs with other funds and investment products.
But we need to have the infrastructure in place to use ETFs for IFAs’ clients. Many funds are sold through the big three fund supermarkets but none of them is ETF-friendly as such, so their infrastructure is not ready yet and they are not flexible enough as there is no commission paid on ETFs.”
But this barrier could also soon be swept away. Cofunds sales and marketing director Alistair Conway revealed late last year that Cofunds is looking at different passive options, saying “We are looking at bringing ETFs into play at the back end of 2010.”
Skandia and Funds Network have both said they are actively looking at expanding their investment options to include ETFs.
Hince says the combination of regulatory changes and easier access will make ETFs more popular but says IFAs will still need to be educated in their benefits.
Hince says: “We are still at a very educational stage with IFAs, really at phase one still. What are ETFs? How do they compare and contrast with other products? Are they able to advise on them? How they work with taxes?
“But once IFAs are more comfortable with them, once they are more accessible and once regulation evens out the playing field, it will lead to a much greater take-up of ETFs.”