When Advisors Can't Access Your ETF

August 19, 2020

Editor’s Note: This article is the third in a five-part series addressing the distribution challenge across the ETF ecosystem, from issuers to advisors to home offices and end investors. Jillian DelSignore is principal at Chicago-based Lakefront Advisory, a firm focused on improving and scaling distribution strategies in the ETF industry.

 

It’s easier to bring new ETFs to market today than ever before due to market dynamics we’ve discussed before, and competition is increasing among a growing number of issuers. This expansion of the ETF industry, however, has created unique challenges for issuers, advisors and home offices.

Let’s look at what these dynamics and the flood of new ETFs coming to market mean to advisors—the challenges they face, whether by definition a fiduciary or not, as they try to do what is best for their clients.

A word we’ve used a lot in this series is “access.” Distribution is about access. In the case of issuers, the question is, can their key advisor prospects access their ETFs? And do they have the resources to access those advisors?  

Advisor Access Not A Given

For the advisor, however, it’s: Can they access the ETFs they want for their clients? That may sound like a given, but it’s far from it.

Before we address why access can be complicated at the advisor level, let’s add another important word in this conversation: choice. For issuers, it’s about bringing choice of products to the market, reaching areas where maybe there hadn’t previously been access. That’s a good thing, as it often adds great innovation to the ETF industry.

But for advisors, it’s about having the choice of thousands of products to select from in nearly any asset class you can imagine. That is also generally a good thing, but it can be complicated to have too much choice.

Let’s unpack the complications or challenges that both access (or lack thereof) and choice present to advisors.

The decision to become a financial advisor brings with it many choices that must be made from the very beginning:

  • Do I go work at a wirehouse that brings me infrastructure and support?
  • Do I go independent but attach to a broker-dealer?
  • Do I want to be a business owner and start my own firm as a registered investment advisor (RIA)?
  • If so, what custodian do I want to use?

Those very first decisions actually have a major impact on what advisors will ultimately be able to offer their clients in terms of not just service but investments. Said differently, these decisions have a major impact on what access they’ll have to investments for their clients.

For example, as an RIA, an advisor can access any ETF they want. Depending on where they custody their assets, some of those ETFs are commission-free, even though that became irrelevant last year when the major custodians entirely did away with commissions on ETFs. As an RIA, the ETF world is your oyster.

Now, if you instead are an advisor at, say, Morgan Stanley or Wells Fargo, the ETF world is not your oyster. Your world consists of a subset of ETFs on the market based on what your platform has approved for your access. Keep in mind that this is not unique to those two firms.

Every wirehouse and broker-dealer has its own approval process with varying criteria an ETF must meet to be eligible for placement in the platform. There are also additional criteria to become “recommended” and eligible for model placement, and so on. It’s great on one hand that you have professionals doing due diligence, but challenging on the other hand, as you may not have access to something you want right away, or ever.

Due in part to RIAs having ready access to all ETFs on the market, they tend to be target No. 1 for all issuers when it comes to distribution. But whether you’re an RIA or a smaller advisor, a solid due diligence process is more critical than ever. Even if you have a professional doing due diligence for you, let’s not minimize the importance of having a process of your own to determine what is the best ETF for use in client portfolios.

What matters when picking an ETF? Who is the issuer? Does the size of the ETF matter? How does it trade? What’s the index construction or active management process? What’s the expense ratio? Does the issuer have a capital markets desk that can help me understand the trading costs? These are just some of what should be considered. The great news is that, as an industry, we prioritize education for investors, and both issuers and home offices stand ready to support the process.

Advisors Have It Challenging

Again, going back to that very first choice as an advisor, the answer to that question impacts access to an ETF that you may think is best for your clients. This is becoming more significant as the industry evolves—more innovative products like active nontransparent ETFs or any host of others from the growing number of issuers. Can you access them? If not now, when? Issuers would certainly love all advisors to have access from day one, but the reality is, not all do.

This isn’t easy for anyone. There are more ETFs coming to market every single day, and they aren’t as “vanilla’ as they used to be. Some home offices feel like they must provide a filter on what is made available to their advisors to help in their due diligence process. Issuers of all shapes and sizes understand that this is the way of the world, but it doesn’t make it any less frustrating, particularly as a new issuer learning the process.

It’s not easy for anyone, least of all advisors. On top of everything, we find ourselves in a time of increased volatility and an uncertain economic environment. As an industry, we are searching for ways to make it simpler for advisors to build their businesses, service existing clients, provide resources to navigate markets, portfolio construction, and of course, tools like ETFs to use.

The home office plays a critical role in not only providing support to their advisors, but also in what they make accessible to advisors, and the behaviors they’re encouraging as a result. But we’ll dig into the world of home offices in our next article.

You can read the previous two articles in this series here: ETFs Are Sold, Not Bought and Distribution Challenge ETF Issuers Face.

I’d love to hear your thoughts and concerns about ETF distribution throughout this series. Reach out to [email protected].

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