A great migration from active to passive is happening, with many benefits for advisers and clients
Demand for passives has seen another record year. Research from BlackRock shows that $81bn (£57bn) was poured into ETFs across Europe in the 12 months to the beginning of January, with investors tilting exposure towards emerging markets and European equities. The surge in demand has also broadened out to the fixed income space.
In the UK more specifically, a migration from active to passive is happening, but not as quickly as you might think. Investment Association statistics reveal a more restrained growth curve, as advisers and allocators combine both strategies.
Three-quarters of assets in the retail sector are still managed on an active basis, compared with 83 per cent a decade ago – just an 8 per cent decrease. Data flow levels do show striking trends towards ETFs in equity fund selection, but this is still from a low base.
So the revolution is just beginning. But a combination of technological, behavioural and regulatory factors are creating an inflection point where ETFs will start to have a greater effect on the advice and wealth management industry. Here are seven trends driving the change.
1. Evolving the advisory model
Advisers are increasingly recognising the value of outsourcing and discretionary fund managers are identifying the potential of the platform market to grow their businesses. BlackRock estimates that 60 per cent of advisers are outsourcing portfolios to multi-asset DFMs or similar.
Running alongside this, we are also seeing an exponential rise in the use of ETFs by DFMs. As such, advisers and clients are gaining exposure to previously unheard of levels of granularity and tactical solutions at a lower cost.
Novia believes advisers have been slow adopters of ETFs because they see them merely as lower-cost alternatives to unit trust trackers. But they are starting to look beyond the narrow lens of cost to what ETFs offer above traditional investments.
2. Rise in thematic investing
Thematic investing was once the preserve of tactical or hobbyist investors seeking to access esoteric asset classes. Now, ETFs are rapidly opening it up to advisers.
The thematic market provides investors with exposure to a spectrum of trends from cyber security to commodities. Following growing interest in the rise of automation, both ETF Securities and BlackRock have launched robotics funds. The BlackRock ETF – iShares Automation & Robotics UCITS ETF – has already passed the £1bn milestone, underscoring the explosive growth in the area.
We are also seeing increasing demand for responsible investing and religious thematic factors. According to BlackRock, flows into sustainable ETFs are now $230m per month. Smart beta is also expected to see fresh flows as DFMs look to allocate to specific factor tilts.
3. Enhancing the investor experience
A whole new generation of investors, including more women and millennials, are less interested in wealth management heritage and more focused on seamless transfer.
What unites this diverse audience is the importance of the experience. For example, in a Nutmeg survey, performance ranked fourth in a list of client priorities. Firms such as Google and Amazon now command brand loyalty, as the credibility and visibility of high street banks and other financial services has diminished. The industry needs to get better at selling the investing experience and delivery of
The pioneers in this area are companies like Wealthify, Scalable and Moola. The focus has been on the interface that helps investors align their goals, but looking under the bonnet is equally as interesting, with ETFs used to power cutting-edge investment allocation.
4. Big players entering the fray
Key issuers such as BlackRock
have dedicated large resources to education, which has laid the ground for the growth of ETFs, with robos enabling seamless access. Bigger players are taking notice and the scene is now set for retail players to enter the fray.
The news that Royal Bank of Scotland is planning to launch a robotics service for more than five million NatWest customers is testament to how the market has moved and shows we are nearing an inflection point. The funds will be graded according to risk levels and will invest in ETFs to keep charges low.
5. Hybrid model points to the future
While digital investment platforms are appealing to certain segments, many clients are hesitant to invest without human intervention, so we are seeing a trend towards hybrid solutions to harness technology with a human touch. This is already evident in the US and is likely to remain so for the next 10 years.
6. Fractionals finally add up
The lack of fractional share dealing and the necessity to buy whole shares was a major hurdle to the adoption of ETFs in the UK. Now, following the lead of Novia, we will begin to see more platforms adopt fractional dealing and build a wider investable universe for small or micro investors. It is a key milestone in the democratisation of investing and the ETF market.
7. Regulatory change
Improved transparency arriving with Mifid II could also help the rise of ETFs.
ETFs already have better price transparency, but when costs and charges are displayed to end investors in pounds and pence, there will be a lot of pressure on traditional products to compete.
In many ways, technology and the use of ETFs is helping drive the change envisaged by the regulator.
Helen Oxley is head of business development at Winterflood Business Services