How I Built My ETF Advisory Practice

I was one of the first to jump into the ETF realm, and there have been hurdles with my practice along the way  

Reviewed by: Stephen Walters
Edited by: Stephen Walters


Stephen Walters will be talking about how he built his advisory practice at our upcoming conference, Inside ETFs Europe, in Amsterdam this year. Click here to see the full agenda and register.

In the spring of 2009 I decided that my IFA business would suffer several waves of pressure over the next five years, and I needed a survival plan.

No one could have foreseen the events that followed: untrustworthy politicians digging the UK deeper into national debt; upward longevity tipping the UK into a decade or longer of retrenchment; the internet becoming ubiquitous; the impact of the Retail Distribution Review, which would cause ripples of unexpected consequences.

Maintaining Independence

With all this to come, I reviewed my options. I chose to remain independent, free from the conflicted interests of platforms. By 2010, I’d read some articles about exchange traded funds, and dared to predict they would soon become an enduringly popular vehicle for UK retail investors. These investors were starting to manage their own money online, they’d have an appetite for data, for education and for guidance. As a result they would flock to ETFs as the obvious first resort. I planned to be there to meet their needs.

Although ETFs are commonplace in the U.S. and Canada, over here they’re just looming into public view, and my sense of timing was premature. So if you are now considering an ETF service in your own practice, you may feel relieved to arrive in the wings with a little time still to prepare.

Making Mistakes And Moving On

In the summer of 2010 I invited a few prosperous clients to experiment in self-managing a simple portfolio of ETFs via an online stockbroker. It was my hope we’d confer often, share our experiences and learn together.

The pilot project didn’t go to my plan, but I learned a lot. They all liked saving money on charges and stamp duty, and they enjoyed logging in for as long as their portfolio was rising in value. When fund performance began to disperse, some clients wondered if they were too diversified. After a while their engagement in the project began to wane.

A mentor reminded me: “When funds rise, that’s the market doing its thing. When they fall, it’s your fault.”

Continuing The Experiment

When the next market fall happened in July 2011, their interest was revived and portfolio diversity gave them a sense of relief. My clients remained willing to continue the experiment, but they asked for assistance in timing the market, while not trading too often.

I found that I could provide an added value service and receive more subscriptions, and with it a small monthly fee.

Informing And Educating My Clients

I plot three-dozen indices daily; and against them I chart the 50-day and the 200-day moving averages, which allows investors to focus on smoothed out performance rather than day to day price fluctuations.

Subscribers have access to the charts via a Dropbox account. Whenever any index slips to the 50-day MA or to the 200-day MA, I send out a “smoke alarm” email. Of course subscribers can react to my warnings however they choose.

Every weekend, I also send them an email with general data and articles they might find useful and to answer any questions they might have asked.

Filtering The ETF Market

By summer 2012 it was clear ETFs were not catching on in the way I’d anticipated. Platforms seemed reluctant to make room for them. Like an ill wind, slanging matches about physical versus synthetic replication had brought no good to ETF issuers. Also nobody had yet collated a table of ETFs suitable for UK retail investors.

After hundreds of hours, and with considerable help from other people, I put on my website an interactive table of about 500 funds from across the range of ETF issuers. Some clients find me through this table, and the data about them tells me they are all, in some way, innovators or early adopters of ETFs.

Creating ETF Portfolios

From self-investor clients I have also learned they like choice, but not too much. I now monitor two pools of ETFs. The first is 35 basic ETFs, divided into seven groups of five funds, which I’ve arranged from very long term holds (e.g. S&P 500) via modern-themes (e.g. health) to intrepid (e.g. rare earth metals).

The second group is at an early experimental stage – Beta Plus funds. I’ve selected four groups of four comparable funds: equal weight, dividend, fundamental and low volatility.

These two pools of 49 ETFs offer investors of any level valuable portfolio components.

Prepared For The Future

I look forward to the day when it’s commonplace for young investors to self-manage their pension or ISA portfolio on their smartphone.

Meanwhile, my ETF service is gradually building traction. At times it can feel like pushing water uphill, but when I see wealth managers’ portfolios consisting of 14 percent ETFs, maybe to save costs, I know there’s another big wave swelling; one that will roll over active fund managers and percentage-based IFAs.

By the time this wave reaches me, I’ll be ready to surf it.

Stephen Walters is founder of and manages an advisory practice in Edinburgh