ETF Model Portfolios Change Advisory Biz

June 27, 2014 ETF strategists today command about $140 billion in assets, based on some estimates. It has grown relatively quickly. Is there anything unique about the growth of this segment?

Friederich: When I made the transition over to the strategist space two years ago, I wanted to make sure for my career that this is here to stay, and continue to grow. When I think about my generation and what they want in investing, it makes a lot of sense to see the growing demand for ETF solutions.

I’m from South Dakota. It’s definitely moving off of Wall Street to Main Street. People are wondering, “What are these ETF things?” And they don’t know enough to pick their own. It’s somewhat similar to what happened in the mutual fund industry.

My uncle was an advisor in the ’60s and ’70s. He was one of the old stock pickers, but then mutual funds came to market, and, to quote his own term, he “outsourced the stock picking to the mutual fund guys.”

We’re going from the mutual fund industry where the advisor used to do the asset allocation by buying all these funds together, to where the advisor is going to outsource it to the third-party strategist. That’s more scalable. It all allows advisors to grow their businesses because they have more time to focus on client relationships.

Our data show that advisors spend two days a week on investment-related tasks. Now they have two days a week to… Golf with clients?

Friederich: Exactly. Advisors love that. “Oh, I get a day to golf?” Yes, you get a day to build your business. And how else are you going to do it? You golf with your clients. If you’re in Colorado, you go skiing.

That’s where I think the newer generation of advisors is headed. They want what’s most efficient. They want technology, they want to outsource, they want to grow their business. It’s still early on in the game, and I think the mutual fund industry will be there, the traditional active will be there, but this is a nice—and growing—piece of the game. Are there any particular risks associated with ETF portfolios that are inherent to the ETF structure versus, say, a mutual fund portfolio?

Friederich: That’s a good question. I think the only risk is that there are a lot of different ETFs in the market now, and a lot of them are not plain vanilla, but activelike and factor investing ETFs.

To the end investor, if they’re going to start incorporating more of these active ETFs, these style-factor ETFs, lower-volatility ETFs, it’s extremely important to understand what you own so that they don’t end up with huge tilts in their portfolios they didn’t want. The risk is combining these strategic beta ETFs with traditional market-cap-weighted funds, and knowing how they’re going to act or react, the overlap of exposures.



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