Capital Group: ETFs can help advisors improve practice management, succession planning

Exchange-traded funds can significantly boost advisor efficiency, according to Scott Davis, head of ETFs at Capital Group, who says that the asset class can help free up their time.

“ETF models can help drive efficiency in how they operate as a practice,” Davis told InvestmentNews at the Exchange ETF conference in Las Vegas. “Tax efficiency is usually the number one thing that people think about.”

Capital Group describes itself as world’s largest active manager of ETFs, when excluding companies that have converted mutual funds into ETFs. The asset management and recordkeeping giant has about $120 billion of ETF-based assets under management.

Specifically, ETFs can help minimize potential capital gains compared to mutual funds, according to Davis. “Many advisors would say a historical pain point has been the distribution of capital gains in a mutual fund when the advisor or the investor hasn’t done anything with their investments, they haven’t made a change,” Davis said. “But because of the way that the rules are written and the way that registered investment companies have to distribute income, they will get these tax bills.”

Mutual fund tax burdens have been in the spotlight recently, with some U.S. lawmakers pushing to put the funds on a more equal tax footing with other asset classes.

“In the U.S., if the advisor could take that time that they spend explaining the nuance of capital gains distributions and more productively use it for financial planning, or estate planning, I think they would love to take that time back,” Davis said.

Succession planning is another area where ETFs can bring benefits, according to Davis. “Many [advisors] who are thinking about succession planning or reaching the next generation have recognized the importance of bringing ETFs into their process,” he said. “So, for example, if they have a mutual fund model that they use … many are looking to create a similar ETF-only model.”

“That helps with, if they onboard an advisor into their practice that only wants to use ETFs, well, they can now be consistent with their investment process," he added.

Research released last year by Capital Group also found that active ETFs could serve as a client acquisition magnet for advisors looking to attract Gen X, millennial, and Gen Z clients.

Also, at the Exchange conference in Las Vegas, Franklin Templeton told InvestmentNews that younger investors are likely to fuel the growth in active ETFs, continuing the inexorable rise of the asset class.