How ETFs fit into a hybrid advice model

By Mark Burgess | October 3, 2018 | Last updated on November 29, 2023
3 min read
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The demand for advice is not diminishing, but the way clients receive and pay for it is, speakers said Wednesday at a conference on ETFs. As advisors spend their time differently, ETFs can be a useful tool.

“[The] rep as PM is on the way down, and what’s coming is real, true, deep advisory relationships—meeting client families where they are, providing advice across their whole life and their whole future,” said Kendra Thompson, managing director and head of wealth management for North America at Accenture. “That requires a fundamental difference in how you spend your time.”

As advice is “decoupled” from the underlying products, ETFs are one of the “building blocks” advisors can use, Thompson said in her keynote at the ETF Summit in Toronto Wednesday, hosted by Advisor’s Edge and Investment Executive.

“We see no downtick in the demand for advice,” she said. But with a hybrid advice model that’s more flexible and investor-focused, advisors need to understand that they’re no longer the only ones providing access and information, and that clients don’t want to pay for services they don’t use.

“The model is only profitable when we look at products like ETFs,” she said.

Kurt Rosentreter, senior financial advisor and associate portfolio manager at Manulife Securities, said his business has gone from roughly 50% mutual funds a decade ago to between 5% and 10% today.

Speaking on a panel about when to use ETFs, he said his practice provides a “platform of neutrality” that offers clients multiple product types: mutual funds, ETFs and individual securities. Being a “provider of all” makes advisors “more powerful” and more competitive.

Linda Schick, senior vice-president and portfolio manager at Raymond James’ Family Wealth Counsel Advisory Group, agreed with Rosentreter that media have overblown the cost of advice. Some clients come in biased against mutual funds due to the fees, but they’re willing to pay for value, she said.

“You want to make sure your portfolios are constructed to achieve goals, and then clients won’t worry about the costs of that,” she said.

Schick and Rosentreter outlined occasions when they do and don’t use ETFs.

Schick said she uses both active and passive fixed income ETFs, as it’s more difficult to access inventory and global markets in that space. Where clients have a low risk tolerance or shorter horizon, though, she builds a bond portfolio or recommends high-interest savings accounts to insulate the portfolio from declines.

She said she would welcome an ETF with a guaranteed component that could compete with the traditional bond ladder. She also said she would be interested in private equity or private debt ETFs.

Rosentreter said he sticks predominantly to equity ETFs. “I don’t want to be sitting in front of a client trying to explain how their safe money is down,” he said, referring to volatility in fixed income ETFs. But he said the administrative side of using bonds is “hugely labour-intensive.”

He would like to see more multi-currency ETFs, as well as information from companies on a level comparable to what mutual fund firms provide.

While advisors need to stay aware of new products, Schick cautioned against chasing the “flavour of the month.” She pointed to the collapse of inverse volatility products earlier this year.

“You have to make sure that when you’re including an ETF or any investment vehicle, that you understand how it actually works and the mechanics behind it,” she said.

In the U.S., Thompson said both launches and closures of ETFs are up, and also warned against being on the “bleeding edge” of new products. Exotic or niche funds, such as those that track new tech and responsible investing, aren’t scaling, she said, and funds with high expense ratios aren’t surviving.

Growth in the U.S. is coming from low-cost smart beta products, a line that’s “totally untapped in Canada,” Thompson said. “It’s a huge opportunity.”

Thompson was forceful in asserting that the trend away from high-fee products will continue. “Expensive funds have had their day,” she said.

For his part, Rosentreter was sanguine about advisors’ role.

“There’s absolutely no threat to the advisory channel,” he said. “People need us more than ever before. I look forward to the next 20 years with all the boomers retiring with no clue how much they need to retire and spending more than ever. And they need us in the middle.”

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Mark Burgess

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.