RDR And Demystifying European ETPs

RDR was anticipated to stimulate greater adoption of ETFs by the retail market, but it hasn't yet. Why not?

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Reviewed by: Marc Knowles
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Edited by: Marc Knowles

When the Retail Distribution Review (RDR) was first introduced at the beginning of last year, many thought it would be the catalyst to stimulate greater adoption of exchange traded funds (ETFs) by retail investors. But the actual pace of growth has been disappointing as it becomes clear the ETF industry itself must step up to educate both independent financial advisers (IFAs) and retail investors about the low cost benefits of ETFs.

As advisers adjust to the new RDR landscape, they are facing challenges. We believe that the lack of readily available information on the European ETF landscape and how it compares to traditional actively managed mutual funds is confusing and off-putting to IFAs looking for go-to resources on the market from which to base recommendations to investors.

A number of the larger issuers in Europe have invested considerable time and resources in providing education to advisers at workshops, through online tuition, and by distributing adviser friendly marketing collateral. While these efforts are to be applauded, the fragmented nature of the European ETF market has meant an issuer by issuer approach has ended up creating mixed messages and in some instances, confusion and uncertainty for IFAs.

European ETFs may have become a victim of their own ubiquity. Liquidity is fragmented due to the large number of funds, listed on different exchanges and often covering the same benchmarks, presenting a confusing picture to both IFAs and their ultimate customers, the retail investor. In Europe, Markit’s ETF database shows 40 issuers with 2,752 products trading across 20 different exchanges.  In some way, they are all looking to present information and data to attract inflows.

Confusion reigns

It was encouraging to see so many IFAs at the recent Inside ETFs event in Amsterdam. However, some of the questions posed highlight there is a real need for aggregated and independent exchange traded product (ETP) data. [ETPs include ETFs and exchange traded commodities)

“What is the difference between a swap based ETP holding collateral and a substitute basket?”

“Are leveraged and inverse bad, if so, are all ETPs?”

“Why is the lowest TER not the lowest cost?”

These are just some of the fundamental questions that many IFAs are still battling with today. But the information that IFAs need to answer these questions, and so best service their clients, is not accessible in an efficient and easy to digest way.

Although advisers are beginning to change the way they work for their clients, the lack of widespread understanding of the ETF market means that many IFAs are holding back from recommending ETF investments to their retail customers.

To accelerate the integration of ETFs into the IFA’s pool of go-to investments, the ETF industry needs to focus on delivering consistent messaging and providing independent data to best educate IFAs and their retail customers

Ultimately, IFAs will want to be able to compare ETFs with mutual funds, in order to present the fullest picture of investment opportunities. But comparing performance and tracking error for ETPs vs. mutual funds on a like for like basis can be complex and time consuming. If investors are to be better served the ETP and mutual fund industry will need to work together to solve this.

The industry has a lot more to do if it is to demystify the ETFs and enable IFAs to fully endorse the products to their retail customers.  Transparency is the crucial component, backed up by the right level of independent information and analysis to both showcase and rank ETFs to alleviate investor concerns. We can then expect to see increased flows into ETPs in the UK and for that matter Europe.

 

 

Marc Knowles is director of ETPs at Markit