Technology Changing Face Of ETF Biz

October 05, 2017 What was the most surprising finding in this report?

Brashaw: For me, it was how little traction or how little growth folks see over the next five years for automated advice platforms. We're significantly more bullish than the respondents.

The reason for that is that a number of platforms out there tend to be relatively simplistic. They ask a series of questions that get put into one of three or four model portfolios.

Clearly that's not leveraging the challenges investors face. We expect features and functions of those automated platforms to improve, and gain traction not just with millennial investors, but others as well, and drive significantly more growth. Is part of the challenge that some advisors aren’t ready to completely delegate portfolio decisions? Is there a reluctance to fully embrace automation?

Brashaw: Not exactly. There's probably a human condition here, as people are reluctant to adopt new technologies until they're proven, but we're starting to see outperformance from organizations that really adopt these technologies.

When you look though at who's being hired, particularly on the very active end of the asset management scale, it's not CPAs or MBAs, it's rocket scientists, people with physics degrees, mathematics degrees, statistics degrees, etc. That’s where the industry is heading.

It's all going to be about data, and the ability to take data and make it into information. In this business, the term “creating information from data” is fundamentally what we're all about outside of the passive space. And we're going to see increasing amounts of that. "The ETF market is a hard market to be in, but a harder market to be out of." That’s your conclusion. ETFs are booming. What's so hard about being in the ETF market today?

Brashaw: When you look at where fees are and where fees have trended from, and where you look at where the growth in assets is, all of it comes in very-low-cost products. I like to say that almost every dollar in ETFs would otherwise have been in mutual funds or other investment products probably at a significantly higher fee rate.

From an industry perspective, if you're not one of the large players getting scale, competing from a fee perspective is a very hard business to be in. There’ve been many firms that have come in and left in the past few years.

All of this is fantastic for investors, of course. But the other side of the coin for ETF issuers is that that is a difficult business to get right. If you're looking to be in that bucket one—that index replication space—you need scale. You’re competing with the big three—something only a few organizations are able to achieve.

It’s getting harder to make money in ETFs, unless you're in the smart-beta space and you're very innovative and you're able to capitalize on that innovation. In the future, we're going to see other organizations come into the active space, and that is by definition not commoditized, it's differentiated, and for whatever reason, some investors are looking to put money with an asset manager with a proven track record, but there you're going to see a completely different fee structure in the active space.

So there are different opportunities looking forward than there are when we look backward.

Contact Cinthia Murphy at [email protected]


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