Thirty years ago, the Toronto 35 Index Participation Fund launched with a 0% management fee. While subsequent Canadian ETFs have cost something to own, ETF manufacturers have steadily lowered product fees over the last decade.
For instance, in December 2019, the Globe and Mail’s Rob Carrick showcased a 10 basis point (bps) “Freedom” portfolio. Two years prior, the same portfolio cost 15 bps.
Things are even cheaper in the U.S. At the Inside ETFs conference in January, Dave Nadig of ETF Trends presented a portfolio that cost three bps on a weighted-average basis, with one constituent S&P500 ETF priced at zero. Investment management is “solved,” he declared.
Other speakers, however, collectively drew a large asterisk after that statement, pointing out that you usually get what you pay for — and that financial advisors still need to help clients with due diligence.
“Some of the higher expense ratio products did the best last year,” said Ed Rosenberg of American Century Investments, noting that the performance spread for the approximately 75 funds in the U.S. value category was about 14.5% in 2019.
“If something is of value, it shouldn’t be free,” said Sue Thompson of State Street Global Advisors. Luke Oliver of DWS Group agreed, saying, “Bringing fees down to a natural equilibrium is great for investors. When we get to a point below that, the issuer is gambling on massive scale to make that fee work.”
Even the aforementioned zero-fee fund from SoFi (its primary business is student loan refinancing, mortgages and personal lending) normally costs 19 bps; SoFi is simply waiving that fee until “at least June 30, 2020.” Meanwhile, other S&P 500 ETFs are available for as low as four bps.
Rational low-fee investing has widespread benefits. But regardless of whether ETFs should be free, industry observers told me true zero-fee funds won’t come to Canada any time soon due primarily to our smaller scale — both in general and thanks to platform barriers for mutual fund advisors.
Ken Kivenko of Kenmar Associates highlights another, perhaps unexpected, barrier to truly commoditized investment management in Canada: our regulatory environment.
After declaring investment management “solved,” Nadig and his colleague Matt Hougan urged financial advisors to reallocate their time to higher-value activities, such as behavioural coaching, providing career advice, tax planning, pension timing, insurance, bill payments, whether to lease or buy property, education planning and more.
This approach might work in the U.S., but our fragmented frameworks don’t easily accommodate refocusing one’s practice away from investment management: people are registered to sell products, while advice-giving is largely unregulated.
As Kivenko points out, that makes it difficult to hold someone accountable for bad advice.
“The firms advertise holistic financial advice, but the [securities acts that indirectly govern the dealers] are literally geared toward the trading of securities,” he says.
He wonders if the Ombudsman for Banking Services and Investments would take on a complaint case for bad career advice, inappropriate bill payment suggestions or inadequate education planning. “I think some of these activities amount to off-book services,” he says, adding that firms may not back up their advisors who go beyond securities-related advice.
Evidently, the regulatory regime has not caught up to investors’ needs. Clients benefit when their financial advisors can provide informed, well-researched opinions on life’s challenges — within the boundaries of their expertise, of course.
Not accounting for the issues Hougan highlighted out of fear of reprisal from compliance will lead to poor client outcomes. “People do need more than just investment advice,” says Kivenko. The current regime also means that fee-only advisors fall outside of any oversight.
By regulating advisor titles, Quebec, Ontario and Saskatchewan are trying to create that oversight. Other jurisdictions may follow. Unfortunately, regulatory arbitrage may also follow: back in November, Advocis CEO Greg Pollock suggested at his organization’s regulatory symposium that insurance licensees won’t be captured by Ontario’s title legislation. The claim went unchallenged by the panellist from the Financial Services Regulatory Authority of Ontario.
If the U.S. experience is any guide, the fee pressure created by ETFs over the last three decades will only increase, creating more urgency for a rational framework that allows financial advisors to make a living from activities beyond investment management. A regulatory environment that supports credentialed, educated advisors who do broad-based, holistic planning would benefit everyone.
Such an environment may be one of the best legacies of ETFs. Let’s hope getting there doesn’t take another 30 years.
How much advisors allocate to ETFs
- Respondents to Investment Executive’s 2019 Brokerage Report Card reported allocating 7.6% of their assets under management to ETFs.
- According to Cerulli Associates’ research, in 2019 U.S. advisors reported allocating 15% of their assets under management to ETFs. About one-quarter of U.S. advisors still don’t use ETFs.