The Future Is Bright For ETF Advisory Firms

Kristopher Heck set up Tanager Wealth in 2012, after a decade at iShares. Based in London, the firm offers financial planning and investment advice specifically to U.S. expats and other U.S. taxpayers. Today it advises 60 families with close to $100 million worth of assets collectively and ETFs comprise around 85 percent of Tanager Wealth’s portfolios.

Chief investment officer Heck talked to ETF.com about how his experience at iShares helped him to build his own ETF-focused business, his gripes with smart beta and his hopes for the future of ETFs in Europe.

ETF.com: Tell us about your experience at iShares and your transition to the buy-side.

Kristopher Heck: I started in a strategist role at iShares in 2000, having been hired from Thompson Financial where I was an ETF analyst. I covered the discretionary fund manager market and worked closely with management to make sure the ETF products targeted the right people, were messaged appropriately and structured to do things such as minimise capital gains.

I left in 2010 and worked with a client to help build up their discretionary management platform. I decided to eat my own cooking and set up my own business – with a few choice partners – that could help fellow Americans manage their money and navigate the tax challenges we face. All the financial advisers at Tanager Wealth are American citizens living in the UK, so we have an expertise in understanding the intersection of U.S. and UK taxes.

ETF.com: How did your experience as an ETF provider help when becoming a financial adviser?

Heck: I have seen the best and worst practices in the financial advisory space, from both the U.S. and the UK. I have had the privilege of being able to learn through lots of other people’s mistakes, and hopefully avoid them at Tanager.

I have seen advisers talk about what they want to talk about, rather than reflecting the client’s needs and values. Often clients don’t place their emphasis on the geeky, mathematical side of managing money – they want assurances that their money is in a safe pair of hands and that you are acting in the capacity of an independent fiduciary and not as a salesman pushing particular products.

They want to have a holistic service that answers their needs and solves the challenges they personally find important.

ETF.com: How would you say the ETF space has changed over the past decade?

Heck: A changing user base and an increase in targeted exposure have been the biggest changes. When I started there were something like 20 ETFs and now there are thousands. There is now much more choice and I have seen a tremendous adoption from financial advisers and retail investors in the past decade.

They like the low cost, tax efficiency and the liquidity and transparency of the products which have been borne out at several times throughout my career. After the mutual fund scandal in the U.S. in 2003, we saw billions of inflows into ETFs because you can’t front-run an ETF in the way it was done with mutual funds.

The financial crisis in 2008 highlighted the value of targeted exposure and knowing what you own.  The ETF space has really evolved in that sense and you can know what you are buying and, just as importantly, what you’re not buying – a product that is ex-financials, for example.

ETF.com: What is your approach to ETFs? Where do they sit in your portfolios?

Heck: We access ETFs using standard platforms in the UK and the U.S. – we have business on both sides of the Atlantic. We trade them on the stock exchange like anyone else would, generally using limit orders and maybe trailing stocks if we can. We use them across the portfolios – they comprise of around 85 percent ETFs – and it is really good to be able to get targeted exposure in a really low cost, tax efficient and transparent way.

We like to have the managers in the box and know exactly what they’re doing, so that we can control asset allocation ourselves. There needs to be more clarity in the industry in terms of what managers actually do for their clients. With ETFs we know exactly what we are buying, versus a “growth and income mutual fund”, for example, which is a description that tells me nothing.

The remainder of our portfolios tend to be made up of standard mutual funds and occasionally direct bonds and stocks, if appropriate.

ETF.com: There has been a lot of noise around ‘smart beta’ ETFs – what is your view on these products?

Heck: I don’t think the term ‘smart beta’ is a valid moniker. ‘Smart’ implies you are actively thinking and aren’t rules based and it can’t be ‘beta’ if it isn’t market-cap weighted. So they’re neither smart nor beta. You could call these products ‘factor funds’, ‘enhanced indices’ or ‘alternative weighted indices’. 

We aren’t big fans of alternatively weighted indices, because they’ve not really been tested over time. They can be good if you want a specific formula to manage a specific piece of your portfolio. If you understand the formula then yes, they can be less expensive than a traditional active manager, but I would still rather stick with market cap weighting if possible for equities. For the fixed income I think there might be room to grow in that space.

I think factor funds (i.e. This ETF is pure small cap, pure momentum etc.) have a lot of validity, as long as you decide what that factor is and understand the part it plays in your portfolio. But this is where it is extremely difficult for financial advisers to use factor ETFs, versus large global pension funds, for example, because we generally don’t have the software to do the analysis and decide what factor underweights or overweights we already have in our portfolio.

ETF.com: How do you think ETF providers can improve their offering?

Heck: ETF providers can improve their offering, particularly across the UK and Europe, by having greater centralised liquidity. I would also call for greater understanding of what sources of liquidity come from where for financial advisers, as this can differ from institutional investors. There needs to be a consolidated tape across Europe than includes ETFs because at the moment there all these different centres of liquidity and it is too fractured.

Secondly, they can improve their offering by continuing to innovate and offer access to new sectors we can’t access currently. There was a recent launch of a convertible bond ETF, which was welcomed, for example. I would like to see innovation in the fixed income space and areas such as different preferred shares and different currencies, for example.

ETF.com: Do you think the ETF space will continue to gain traction from financial advisers?

Heck: I think ETFs will continue to grow within the financial advisory space and I think the future is very bright for them. It is only limited by how much willpower there is from ETF providers to continue to innovate and to somehow create better connectivity for financial advisers to trade ETFs and to analyse them. In summary, we need better trading capabilities, consolidated liquidity and better software availability.