Why ETFs On Platforms Could Grow Another 70%

Why ETFs On Platforms Could Grow Another 70%

There is a sound investment case to invest in ETFs via advisory fund platforms – we just need to stop making everything so complicated

Reviewed by: Bill Vasilieff
Edited by: Bill Vasilieff

Why are ETFs not sold much more in the UK retail market, given their popularity in the U.S.? I was asked this question time and time again at various ETF conferences this year. It does at first appear a mystery, but one I can attempt to solve.

Everything You Could Ever Want

Given the need for financial planners to advise across the whole market, it is surprising that ETFs and investment trusts are not sold more widely. ETFs offer opportunities to invest in low-cost funds across lots of asset classes at a level of granularity that unit trusts and open-ended investment companies (OEICS) just don’t cover. ETF provider iShares alone offers many examples of niche and exotic markets, including Indian equities, global water stocks and timber companies – and many more. Choice has its advantages, but the plethora of products can also be part of the problem if it confuses investors.

It is undeniable that unit trusts and OEICs have the benefit of familiarity and adviser habit on their side, which was partly driven pre-Retail Distribution Review (RDR) as these instruments allowed advisers to gain sales commission, and therefore tended to dominate the retail investment market. But it was not so very long ago that life products held that space, which is proof that adviser habits and dominant products do change over time.

Platforms Play A Massive Part

The vast majority of retail money is now invested through platforms so they also have a big part to play in the growth of this product. Unfortunately, many platforms cannot offer ETFs as the functionality was never built to administer them and they can only handle unit trusts and OEICs. In the background systems are being built (slowly) to enable these platforms to offer ETFs and investment trusts.

But rather than putting their hands up and saying ‘OK, guilty as charged’ they instead choose to adopt spoiling tactics like saying there is no demand for ETFs and, even worse, saying: “Don’t touch ETFs, they are high risk”, which is of course rubbish. This attitude helps no-one.

In my view, a platform that cannot offer ETFs and investment trusts isn’t fit for purpose for the independent adviser in today’s post-RDR market. When going through the due diligence process in selecting a platform, advisers and industry commentators should focus more on what assets and functionality a platform can provide rather than purely focusing on price; the old adage of value against price is as important in the platform market as anywhere else.

Just Too Complicated

But it doesn’t all come down to platforms. One of the problems is that ETF providers just make things too complicated, which will not help to change adviser habits. Even the names used for ETFs may seem unnecessarily long and technical.

However, judging from the ETF provider presentations I have sat through, they do tend to make minor technical points appear unnecessarily complex and frankly they lose their audience. My advice to them would not necessarily be to ‘dumb it down’ but rather don’t create worries and concerns that just aren’t there; listen to your audience and gear the information to a level that suits their understanding.

Sadly, I came out of one conference and every IFA I spoke to said much the same thing – “I was thinking of using ETFs, but this conference just made up my mind not to use them”. That, surely, was not the aim of the event and must have been very disappointing given the opportunity to gain a few converts.

A Bright Future

The good news is that not all is doom and gloom for ETF sales. We have seen the amount of money on the Novia platform going into ETFs growing fast in the last year – 70 percent growth since last June – albeit from a low base. There is no reason not to expect this trend to continue.

A criticism often levied against ETFs is that the trading costs are too high but here at Novia we mitigate this by bulk trading. We also expect to be able to offer ETFs at even lower cost in the next two or three months and that price disadvantage – which is much more perception than reality – will largely disappear.

There is a sound investment case for the use of ETFs on platforms which, in my opinion, not many advisers are aware of. But once the benefits catch on, providers will stop getting lost in detail and advisers will become more familiar and comfortable in this market.