Focus on fiduciary boosts ETFs

Pricing transparency and the shift toward fee-based advice are benefiting exchange-traded funds, BlackRock executive says

Jun 7, 2018 @ 10:42 am

By Jeff Benjamin

Exchange-traded funds have been a quiet beneficiary of the increased focus on transparency and fiduciary responsibility, according to a panel presentation Wednesday at Pershing Advisor Solutions' annual Insite conference in Orlando, Fla.

Dominic Maister, a managing director at BlackRock Inc., said pricing transparency was one of the "three structural trends" that are leading more investors and financial advisers to embrace the use of ETFs.

"It's pricing transparency, but it's also about being able to measure whether the product does what it says it will do," Mr. Maister said.

Another driver he cited is the steady transition away from commission-based brokerage accounts toward fee-based advice.

"We know that ETFs make up 1% or 2% of the book of business for a broker, but when they switch to fee-based, that goes up to 15%," Mr. Maister said. "Part of it is the DOL rule, but it's not just the DOL rule. Firms, in general, appreciate more predictable revenue."

The third trend he identified driving the movement toward ETFs is the "separation of alpha from beta," a reference to the inexpensive market beta exposure that ETFs can provide.

"If the most important decision is asset allocation, you should be indexing," Mr. Maister said.

Acknowledging the low barriers to entry for launching an ETF, the panel, which included John Hoffman, the U.S. head of ETF distribution at Invesco, and Dan Waldron, ETF strategist at First Trust, said the next level of innovation in the ETF space will involve distribution.

"From a product perspective, the innovation will change," said Mr. Hoffman. "The barriers to entry are low, but the barriers to success are high. I think you'll see more innovation on the distribution side."

But even if the ETF industry ups its focus on getting ETFs out the door, Mr. Waldron said investors and advisers shouldn't expect a major pullback on the creativity related to what goes inside an ETF.

"Active is the future, and that's where it's heading," he said. "There will also be continued growth in fund of funds ETFs. Bundling will be an area of real growth. And don't forget about dynamic allocations as an area of growth, where ETFs are switching from something like cap-weighted to equal-weighted inside a fund."

(More: 10 most popular actively managed funds and ETFs)

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