How the ETF Industry Risks Killing Its Golden Goose

Talking down to customers turns them off. The industry needs less arrogance and a dash of humility.

Reviewed by: Staff
Edited by: Ron Day

The $9 trillion ETF industry, which employs thousands, generates millions if not billions in profits and enjoys a reputation for innovation, is in danger of killing its proverbial golden goose.  

This occurred to me after I received an email last week from an ETF wholesaler whose name and firm name will be withheld because pointing fingers at others isn't really the point. 

We understand the concept of the “last straw.” And we also get that the investing public can see through financial service providers disguised as salespeople, when they are selling products and not advice. I am concerned that the approval rating of our industry's people may be going in a similar direction as that of the U.S. Congress.

I’ve been in one business in my entire 38-year career and that's investing: investment advisory, investment publishing, investment education.  

In some of my current work, I have the enjoyment of communicating with investors who react to what I write, or subscribers who have questions. Most are self-directed investors, and don't use advisors.  

I feel I have a decent grip on what these so-called “retail/do-it-yourself” investors are thinking about broadly. The ETF industry and financial advisors should want to hear it all. I know I did when I was an advisor.  

What Got My Goat? 

That’s the question my editor, Ron Day, asked me before saying “yes” to writing this message to the industry, from a guy who has been a fly on its wall since 1986. It was an email from an ETF firm, and it embodied an attitude retail investors are either tired of or simply avoid at first site: the sales pitch.  

Branding in the ETF world is about creating products that either fit an identified need, or bringing to market what investors may want if they had it at their fingertips, which is the case with any ETF, given that they trade on the stock exchange. The latter case reminds me of the famous Steve Jobs quote, “people don’t know what they want until you show it to them.” Brilliant, so true, and entirely applicable to the ETF industry.  

That industry is booming, which is satisfying for those who, like, me started owning them back in 1993, when the SPDR S&P 500 Trust ETF (SPY) debuted. Awesome progress!

The Email That Broke The Camel’s Back

The email I received was like a time warp in its raw arrogance and salesmanship. This was just someone at a firm doing their job, and a firm that, like many, is trying to be heard in a top-heavy industry where just a handful of ETF issuers dominate the asset-gathering. This wasn't the first of this type I’ve seen—it's common in the industry and likely wasn't the last.  

I’ve edited the message just a bit to prevent “outing” anyone. This aims to be instructive, not preachy.  

I was told this was my “last chance” to engage in a communication regarding the firm’s ETFs. “Last chance?” I thought. Is the firm going out of business and de-listing their ETFs? Because I can’t think of another reason that this would be the “last chance.”  

I was encouraged “not to miss the opportunity.” Where have I heard that before? Oh yeah, everywhere, all the time! One of the great things about the way we’re set up at is that the mission is to put information out, add in some light opinion and analysis, but never assume to know what any investor or advisor wants or needs. We are publishers, not personalized advice-givers. 

I have had to explain that to many retail investors, so anything that adds to that confusion of fiduciary versus not is a big issue in my view. I’ve been on both sides, via decades as fiduciary and the past few years voluntarily distanced from that role.

I was invited to schedule time to discuss how that ETF could help “support my financial goals.” I can’t tell if they were aiming this mass-email at individuals, who have financial goals, or advisors, whose own financial goals are clearly secondary if they are fiduciaries.  

The ETF business is on its way to delivering what investors and advisors want. ETFs offer such a range of reward/risk tradeoffs, they can do way more than any other asset type I know of. The only thing that could screw that up would be taking the target audience’s eyes off the prize. Strange sales tactics would be such a risk.

Summing Up

I’d just like to see the ETF industry “read the room” a bit more. Many investors and advisors now start with skepticism about financial products, since they get thousands of digital “stimuli” on their phones every day.  

Differentiation is everything. Smaller ETF firms need to accentuate their differences, not accidentally threaten their audience about missing out if they don’t respond to an email. The ETF industry does some of this, but the financial newsletter business takes the cake in this regard. “Less, hype, more help” would be a good mission.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.