ETF firms advising advisers on fee rules
Learning curve ahead with new regulations
Canada’s financial advisers are bracing for some tough conversations with clients later this year when regulatory changes requiring greater fee transparency take effect, but the country’s exchangetraded fund industry is highly motivated to help make those chats go smoothly.
From market leaders such as BlackRock Inc.’ s iShares and Bank of Montreal to smaller players including First Asset and First Trust, ETF providers see a huge opportunity to grow assets under management by stepping up efforts to educate advisers about their lowcost offerings and help them understand how they can add value and continue to justify their roles as a conduit for sound investment planning.
“We have little doubt that new regulations like CRM2 will help accelerate the use of ETFs,” said Karl Cheong, head of ETFs at First Trust in Canada. “But it’s a lot of missionary work and we are spending a lot of time in front of advisers trying to explain how the product works and can benefit them.”
The increasing engagement with advisers by First Trust and its counterparts is largely being done through outreach presentations and seminars designed to increase knowledge and articulate how ETFs might be used in addition to and as a replacement for higher- cost mutual funds.
Cheong said ETF knowledge is not keeping pace with the number of products being launched and the amount of assets flowing into exchange- traded funds. As a result, many advisers are ill- equipped to recommended them to clients who are interested in reducing the fees they are charged.
“ETFs have grown so quickly over the last few years that few have taken the time to truly understand how they work,” he said. “There are investors with billions of dollars invested in ETFs that don’t understand the basic principles governing these funds.”
Beyond these efforts to better educate advisers, ETF providers in the country are also encouraging them to re- evaluate their value proposition to clients.
The Vanguard Group, for one, believes advisers may be better served by changing their performance benchmark from the market’s return to the returns that investors may achieve on their own without professional guidance.
To that end, Vanguard quantified the “alpha” that advisers provide to clients in a recent study, saying those who follow best practices can add about three per cent in net returns annually. In particular, they can add 1.5 per cent by helping clients maintain a long- term perspective and a disciplined approach to their portfolios and another 1.31 per cent from employing cost- effective investments such as ETFs.
Atul Tiwari, Vanguard’s managing director in Canada, said greater fee transparency as the result of reforms being implemented will make it even more important for advisers to successfully communicate their value beyond just stockpicking by focusing on the ability to create wealth in several different ways. At the very least, they need to be proactive and not wait for the statements to go out and have clients phone in complaining about fees they didn’t know they were paying.
“A lot Canadians think their mutual funds are free,” he said. “What we’re working with advisers on is to get ahead of that.”