Keeping ETFs, and clients, in-house

By Christopher Mason | November 28, 2011 | Last updated on November 28, 2011
6 min read

Your client tells you he’s leaving to invest in exchange-traded funds on his own. What do you say?

For Jim Steel, president of Ottawa-based Polaris Financial, the immediate answer is more nuanced than “Here is why you should stay,” and depends on a careful evaluation of the client.

“If you have someone who truly does not need your services, then you do not need to create a need for them,” he says.

Steel speaks from experience. He spent several years coaching a major client on ETFs, only to have the person decide he wanted to go out on his own.

“At first I was upset because I was losing a big account, but when I stopped to think about it, it was clear to me he knew what he was doing,” says Steel, whose approach paid off when the former client referred several new clients to him.

But in most cases, the advisor will feel it necessary to maintain the relationship. Advisors point to several key strategies that have helped them keep clients in the fold amid growing interest in ETFs, a trend that’s expected to continue.

Despite the perception of ETFs as accessible to individual investors, advisors can continue to make a strong case for maintaining a role in their clients’ ETF portfolios.

Even with the supportive press for ETFs as a panacea for investor ills, the majority of ETF investments are still in the hands of advisors, not individual investors.

This reinforces the need for advisors to be equipped for conversations with clients who see ETFs, due to their ease of use and lower cost of trading, as a way to save management fees and go solo.


A conversation that starts with a client expressing interest in going-it-alone can, with the right strategy, become a discussion of the client’s goals and motives; and how those best fit within an advisor-client relationship.

Your response to the client must be customized to the client’s motives. Listen to what they have to say and be open to a variety of outcomes, from maintaining a full relationship to playing a smaller role helping the client select investments.

“I find out what it is they’re focusing on,” Steel says. “If they’re focused on fees, then I’ll talk about fees. If they want value over growth, then I’ll focus on that.”

You also have to walk the client through the realities of investing on his or her own. If you’re working with time-challenged professionals, point out that once the novel intellectual challenge of selecting investments wears off, they’ll be down to the week-in, week-out grind that is the reality of life in the investment trenches. And then there’s the risk of navigating difficult markets. Most professionals will reach the conclusion that going it alone isn’t worth the time or the risk.


An advisor who offers a wider range of services, such as tax planning, risk management, insurance and estate planning, can make a strong case that the client’s needs are best served by staying in-house.

“If they are looking solely at ETF versus mutual fund, and that’s all the broker is doing, buy this versus that, then there’s not a whole lot of value added,” says Tom Trainor, managing director of Hanover Private Client Corp and past president of the Toronto CFA Society. “But if they’re spending a lot of time helping them structure the portfolio, tax planning, risk management and other issues, then there’s a real conversation you can have with them.”

Advisors say that managing tax issues for clients is especially valuable in retaining those who want neither to handle tax issues on their own, nor pay someone else to do it for them.

The cost issue can often be resolved when clients see the level of work and time required to save themselves the management fee



As for the costs conversation, it’s best to get in front of clients, says Robert Broad, vice president and investment counsellor with T.E. Wealth in Toronto.

“Of course they’re better off not paying my fee. Anytime you can save 0.75%, that’s money in your pocket,” he says. “But I say, ‘Look, you came to me x number of years ago because you had an unbalanced portfolio, and you needed advice and a plan that could be executed over time.’ ”

Broad and others concur the cost issue can often be resolved when clients see the level of work and time required of them to save the management fee.

Steel says an alarm goes off if clients cite cost as the first reason to invest on their own.

“The type of client that tries to save the 1% management fee can also be the client calling me saying markets are topped out, let’s sell—or the market’s bottomed, let’s buy,” Steel says. “That kind of person can fall prey to market bias and that is the kind of person I would caution against going alone.”

And then there’s the time.

“When you go alone, you have to track all your costs, any dividend reinvestments, capital gains, adjust for splits, among other things,” Steel says. “Also most people need someone helping them plan their investments and income after retirement.”

Source:Dollars & Sense Research 2010

Trainor adds that as much as ETFs have been portrayed as a simple investment tool, their popularity has in many ways made them even more complicated.

“The level of sophistication you can use to structure a portfolio and manage risks has risen quite a bit, and while those tools are available to the public, it’s legitimate to ask whether they have the time and skill sets to do it,” he says.

“There are more than 1,000 ETFs now, it’s like mutual funds in the 1960s,” Trainor adds. “The concept was great, but before you knew it there were more mutual funds out there than stocks on the New York Stock Exchange.”

Even with the supportive press for ETFs as a pancea for investor ills, the majority of etf investments are in the hands of advisors.


All the research, meanwhile, shows the investors drawn to ETFs are exactly the investors advisors should want as their clients.

A survey by Cerulli Associates, a U.S.-based financial services industry research firm, found ETF investors tend to be wealthier, better educated and younger than mutual fund investors. Specifically, it found people having between US$5 million and US$10 million in assets under management formed the investor group with the highest percentage of ETFs in their portfolios.

Likewise, research by the Investment Company Institute, a national association of U.S. investment companies, found the median annual income of ETF investors was US$130,000, compared to US$80,000 for mutual fund investors.

The research also found the median amount of invested assets of mutual fund investors was US$200,000, compared to US$300,000 for ETF investors.

Further, SPIVA (Standard & Poor’s Index Versus Active Funds) reports regularly publish findings that bolster the merits of passively managed index funds. Mark Webster, Vancouver-based vice-president of regional sales, ETFs at Bank of Montreal, says such findings reinforce the notion that advisors should not fear losing ETF investors, but rather should covet them.

“Although there have been, and will continue to be, investors who choose to manage their own assets, there is clearly an advantage for advisors to prospect ETF investors.”


Exchange-traded funds (ETFs) have been widely described as the salve to the investor who has an itch to go-it-alone. But a growing volume of material online urges those investors to keep their portfolios with advisors.

“Although most don’t like to admit it, it’s very easy to be overconfident in one’s ability to resist behavioural mistakes,” writes the owner of

“The hidden cost of such behaviour can be many times the investment management fee we pay to an advisor.”

The Canadian Couch Potato personal finance website outlined one case for using an advisor for passive investing, called “If I Only Knew…” by Thornhill, Ont. advisor Tony De Thomasis.

Christopher Mason