As the ETF world becomes more complex, it’s more difficult to stick with four basic ETF choices: bonds, Canadian, U.S. and EAFE equities. It becomes more akin to what stock brokers traditionally did: a managed portfolio based on blue-chip stocks and government bonds, plus some secret sauce – promising small-caps or turnaround opportunities.
Mutual funds transformed the stock-picking world in the 1990s, and for many advisors, eliminated the need to pick stocks at all. The burgeoning of mutual funds occurred in conjunction with the collapse in interest rates but also the rise of a new type of advisor, generally recruited from the insurance industry and more used to holistic financial planning than the old-line brokers who were limited to ascertaining whether a particular trade suited an investor’s risk profile.
Mutual funds provided the means to calculate long-term returns and hence prepare a financial plan. They offered one-stop shopping, with instant diversification. Moreover, with embedded fees, they made it easier on the investor wallet.
With greater transparency and lower embedded costs, ETFs are a significant advance. Yet, ETFs bode a return to stock picking, because the four basic flavours aren’t enough. There are also tax considerations and, in a low-interest environment, income considerations.
At the same time, there is more and more coverage of ETFs in the mainstream media and on dedicated websites. In turn, there are more than a few fee-only advisors who draw up a financial plan and give investors guidance on implementing an ETF portfolio. These are long-time industry veterans but their advice doesn’t require them to be registrants.
On a different scale, ShareOwner Investments (which is a registrant) has announced a series of ETF portfolios that investors can buy for a bit less than the individual trading costs of the constituents.
ETFs bring back the broker-dealer model: pure trade intermediation. But the cheapest trade is not necessarily the best financial plan. As the mutual fund model breaks down, financial planners will have to show why.