Advisors Using ETFs

January 21, 2009

You raise a good point, Jim: There's a huge need for better education in the ETF space. There's also a huge opportunity for advisors who are willing to learn.

You and I have discussed this before, but there is a major shift taking place in the financial advisor marketplace. It's no longer good enough for advisors to pick a few actively managed funds run by brand-name managers and charge their investors fees on top of extra-high fees.

The days of outsourcing alpha generation to actively managed mutual funds is over. That model didn't work. A new model, based around a core portfolio of ETFs where the advisor is responsible for generating the alpha, is taking its place.

ETFs are empowering. They allow advisors to manage money in ways we could not have imagined five years ago. Advisors can now build diversified asset allocation portfolios tapping into everything from commodities to emerging market bonds (or not tapping into them, as the case may be). They can build their own structured products for very low fees using ETFs and options on ETFs. They can invest like the best and most sophisticated endowments and institutional asset managers in the world. In short, they can do a better job for their clients.

But with that empowerment comes responsibility: a responsibility to dig into modern financial theory; a responsibility to understand how ETFs work and how they can fit into a portfolio; a responsibility to consider hedging strategies and other risk-reduction tools for certain clients. I was thrilled at our conference at how many advisors realize this; advisors who are doing everything they can to learn (even if the prospect was frightening for some).

The advisors who succeed ... right now ... will benefit tremendously, gaining market share and growing their businesses. Those that don't will be fighting a rearguard battle against competitors who offer lower fees and higher risk-adjusted returns.


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