Platforms And ETFs Have A Long Road To Cohabitation

The majority of financial advisers want more ETFs on their platforms but the response and progress from the industry is varied  

Reviewed by: Kirstie Brewer
Edited by: Kirstie Brewer

Sometimes the numbers speak for themselves. A staggering figure – 82 percent – of independent financial advisers want more ETFs to be made available on the investment platforms they use, according to research from Source.

The IFA market is one that Source – as well as a number of other ETF providers – are keen to capture, and Source knows that an improvement of both the number of ETFs and the trading capabilities on IFA’s platforms are key to driving growth.

“The bulk of investment into ETFs in Europe so far has come from institutional investors, but we expect IFAs to significantly increase their clients’ exposure to these products,” said David Lake, managing director of UK coverage at Source.

Platforms Making Progress

Happily, there are some investment platforms which have confirmed an uptick in ETF usage. Novia Financial has seen a rise of around 70 percent in ETFs alone on its platform over the past 12 months, according to spokesperson Pippa Russell.

“Our in-house discretionary fund manager proposition, which invests heavily in ETFs, has also seen inflows increase by over 50 percent the past 12 months,” Russell said.

Meanwhile, Fidelity’s advisory platform FundsNetwork is responding to positive feedback from advisers by adding 20 new ETFs to its UK retail platform, bringing the current total to 80 ETFs.

Advisory platform Ascentric currently has £437 million worth of ETF holdings on its platform, split across approximately 350 different ETFs and reports an uptick in the use of passives, including ETFs.

“The attitude of DFMs and advisers towards passive ETFs seems to have undergone a significant positive change,” said managing director Jon Taylor. “[Since the RDR] ETF holdings on the platform have risen by 18 percent when the FTSE grew by 8 percent over the same period.”

Earlier this year Ascentric sweetened the deal for IFAs by introducing a new trading inclusive structure and therefore removing the dealing charge, according to Taylor.

Other Platforms Differ On Their Approach

However, the source Survey reveals a mixed picture of the industry at large, in terms of actual implementation and ETF appetite in the retail space. This mixed picture was also reflected by various industry participants that spoke with.

Over 40 percent of IFAs said they have upped the number or weight of passive investments in their clients’ portfolios since the Retail Distribution Review (RDR) came into force almost three years ago, and yet roughly the same number of respondents revealed that their clients have no exposure to ETFs.

Martin Wigginton, head of product and proposition at fund supermarket platform Cofunds said that demand for ETFs remains low  – with less than 3 percent of the platform’s assets under administration typically invested in ETFs and investment trusts.

While Wigginton confirmed that the RDR has improved appetite for passives amongst Cofunds’ clients, it is index funds which are the most appealing.

“The emergence of multi-index funds [a portfolio of index funds] and downward pricing pressure on collective funds has produced some very competitive clean pricing, comparing favourably with the cost of regular trading and ETF rebalancing,” said Wigginton.

This research is backed up by recent figures from ratings house Defaqto, which found that passive index trackers tend to have cheaper annual fees than ETFs if you only take into account so-called “clean” share classes, which do not contain any commission from the pre-RDR days.

The Source survey found that more than a third of IFAs promoted pure trackers, compared to 15 percent who have suggested active ETFs to their clients. Lower down on the menu are smart beta ETFs and ETFs that have alternative benchmarks, with a respective 6 percent and 5 percent of IFAs recommending these funds.

Cofunds does, however, recognise the importance of more esoteric investment solutions in particular circumstances, according to Wigginton, and therefore believes ETFs could have a modest place in some client portfolios.


Wider Barriers Remain

Advisory firm Tanager Wealth uses almost 85 percent of client capital to invest in index-based products, with 80 percent of that channelled into ETFs, but the firm’s founder believes the wider industry still faces barriers to using investment platforms to access ETFs.

“UK platforms are often constructed as packaged product delivery mechanisms first and foremost – most are operated by insurance companies or fund companies after all,” Kristopher Heck explained. “They are not constructed as investment platforms that would include global stock exchange listed securities, such as ETFs or bonds, for example, in addition to collectives [funds] and account wrappers.”

“Specifically regarding trading ETFs or stocks, they [platforms] could allow the IFA to have more control over how and when and where the buy/sell order is placed and executed,” he added. “Even at our high usage rate of ETF investments, it [our usage rate] could go higher if circumstances warrant it.”

The road to increased usage of ETFs is generally a long one amongst advisers. Even those IFAs who are using ETFs appear to be doing so in modest quantities. Almost half (49 percent) of IFAs who took part in the Source research estimated that their clients held no  more than 10 percent exposure to ETFs – with some holding as little as  1 percent.

Craig Burgess, managing director of EBI Portfolios, runs over £500 million in assets but does not currently invest in ETFs as he believes they have no advantages over other types of mutual fund and are difficult to buy on platforms.

“It’s unfortunate they [platforms] cannot offer any scaling benefits, which makes them [ETFs] plain expensive […] you can’t buy part of an ETF share so regular buys for most investors becomes a chore,” he said.

Pressure Will Continue To Drive Change

So what will drive improvement and change amongst platforms? Discount broker Hargreaves Lansdown’s head of passive investments, Adam Laird, believes the two catalysts for platforms to adopt more ETFs are pressure from individuals, who increasingly use ETFs themselves, and want the same from their advisers – and the visibility of institutional ETF use.

“Advisers can see ETFs being used more by institutions and wealth managers, and want to do the same,” said Laird.

Hargreaves Lansdown saw strong growth in ETFs over the summer, when markets were volatile and even saw an uptick in usage of short and leveraged ETFs, Laird confirmed.

“Platform availability is a barrier – some platforms have limited or no ETF coverage and in other cases, they’re expensive to buy and hold,” said Laird. “I think this is improving, but it will take time.”