Will platforms invest to boost ETF take-up?


Platforms are being urged by advisers and providers to increase access to exchange traded funds and reduce trading costs. But are firms willing to make the technology investments necessary to accommodate the products?

Research from Source ETF found  82 per cent of the 103 advisers it questioned think there should be greater access to ETFs on platforms, and 28 per cent believe there should be a significant increase in the ETF products available on platforms.

The ETF market has reached £3tn globally, with around £2tn of that in the US, where the market is more developed than the UK.

Winterflood Business Services head Alex Kerry says: “One of the reasons a number of advisers don’t use ETFs is that they don’t have access to them through their platforms. Some of the biggest platforms in the market don’t have access to ETF instruments, and that is a big gap in the market.”

Some platforms are investing though. Earlier this month Funds-Network announced it had upgraded its technology to add investment trusts and exchange traded products to its system, while Standard Life announced recently it was putting £30m into developing its platform.

“There is a hell of a lot of money being spent by the big players in developing the platforms. That investment is happening, but it’s going to take a lot of time,” says Novia chief executive Bill Vasilieff.

The platforms that can’t offer ETFs often tell advisers to steer clear of the products, says Vasilieff, which gives the ETF industry a reputational problem.

“The big platforms cannot offer it. So rather than say ‘we can’t do it, our technology doesn’t work’, they say ‘don’t touch them, they’re too risky’. Because they can’t do it they’ve taken a tactic of spoiling the market for ETFs,” says Vasilieff.

However, industry commentators  believe it is a chicken and egg scenario as platforms will not invest to upgrade their systems until there is demand from advisers, but advisers are unlikely to demand what they are not aware of.

Winterflood Business Services head of business development Helen Oxley  says: “We have got to make money which develops the back-office technology for trading and offers custody services.

“If we enable every platform to get access to ETFs and then nobody traded that is a massive cost to us with the integration with the platform, the legal agreements, it’s a huge investment for us.”

But what will drive demand among advisers? The sunset clause could be a catalyst for a pick-up in interest from advisers, says Kerry.

While a lot of assets have now been transferred to clean share classes, the movement of legacy assets on platforms once the April 2016 deadline hits could see them switched into passives and ETFs.

“That might be one reason to switch out of legacy funds into ETFs. It’s a changing market, so you have got to give the right access at the right cost,” says Kerry.

“Active managers have dominated the market against passives because active managers paid trail, passives are going to take a much bigger market share so ETFs should as well,” says Vasilieff.

Some providers and platforms are already seeing an uplift. Over the past 12 months Novia has seen a 70 per cent increase in ETF use on its platforms, although from an admittedly low base. The number of ETFs traded on the platform is now similar to investment trust trading.

Across the industry assets in ETFs have also risen. Assets in ETFs listed in Europe reached a record $68.6bn (£45bn) in the year to October, with October marking the 13th month of consecutive inflows.

ETF Securities head of retail distribution strategy Frank Spiteri says the non-advised channel is also rapidly growing its ETF use.

This rise in demand for ETFs could help nudge platforms into action, but more work is needed to engage advisers with ETFs, says Kerry.

The onus is on ETF providers to do a better job of educating the industry, says Vasilieff.

Initially providers marketed ETFs and educated advisers in too much detail, he says, talking about the benefits of intra-day trading and the intricacies of ETF product construction.

“All providers embarked on an education strategy and we went too technical,” agrees Spiteri. “What the adviser wants to know is, how can I use this and how can this make me look good for clients?”

“Forget about the fancy stuff, no-one cares about that, it just confuses IFAs,” says Vasilieff. “ETF providers talk about the wrong things, they should focus on the extra investment choice you can get from ETFs that you can’t get from passives.”