At the Inside ETFs 2016 conference in Hollywood, Florida, Vanguard Chairman & CEO Bill McNabb made “a plea to competitors” to slow the pace of product proliferation.
“The industry is [introducing a new] ETF, it feels like, every 30 seconds. This is like the 1980s and mutual funds. Things did not end well for all those funds,” he said to an audience of roughly 2,200 advisors and other financial services professionals attending the four-day event.
In Vanguard’s view, investors instead “need basic building blocks,” he added. “We have to be very careful. If we go too far as an industry, people will have doubts about the original construct. And some categories are pretty esoteric.”
Two hundred eighty-five new funds were introduced in 2015, according to Dave Nadig, director of ETFs for FactSet, who spoke after McNabb. This includes funds launched by 23 new issuers.
Commenting on smart-beta ETFs, “or so-called smart beta,” McNabb said, “I think it is one of the greatest names ever.”
Vanguard views these funds “not as indexing” per se but more “as active management, though the bets are done in highly automated … ways.”
There is a “place for those expressing a market view in a low-cost way,” McNabb said. Vanguard has not moved in this direction in the U.S., he adds, but it has factor-based offerings in non-U.S. markets
As for the dominance of the three big ETF players — Vanguard, State Street and BlackRock — the executive thinks there “is space” in the field for smaller players, though he adds that further “splicing and dicing” of investments “probably may not be successful.”
Industry experts do not always anticipate trends in innovation correctly. For instance, Vanguard and others did not expect ETFs as a product to emerge and resonate with investors. “Look at what we did in ’93,” he said, referring to the company’s move not to embrace the product. (BlackRock was the first to do so.)
“But, we got here,” McNabb explained. “There are ways people can still innovate and be successful.”
“We are really a do-it-yourself shop, and increasingly clients asked for help… this kind of advice …, ” he said. “Our target audience for our robo offering is very different from that of the average client of a financial advisor.”
Vanguard is serving smaller accounts with about $50,000 vs. higher net worth investors who typically work with advisors. “Smaller investors deserve the same experience as those who are wealthy,” McNabb explained.
He noted that that success in the robo-advice field depends on being able differentiate a program. “The ability to personalize it is very important."
The blame placed on ETFs as a cause of the Aug. 24 market drop is “completely false," he says, pointing at a case of new trading rules that came into play and affected the markets in ways “that were not exactly as expected.”
In times like these dominated by market volatility, “We tell investors and advisors that it is really important to get the behavioral stuff right around goals and implementation around [a diversified way of investing.]”
It’s not a time for taking shortcuts. “Lower expectations mean that some look for shortcuts to boost performance, and that usually does not work,” he said.
In these conditions, it’s best to remember the need “to be very disciplined over the long run. You can lose a lot [of money] when you move away from your principles.”
McNabb also is quite bullish on indexing: “We will see a significantly higher indexing level five years from now. We will start to see this become a broader and more global [phenomenon].”
More Advice for Advisors
In his speech to a crowd of over 2,000 attendees, the Vanguard chairman & CEO described the world of financial advice as a field that “is evolving” and “is driven by changing demographics, technology and a more powerful consumer.”
While it is a time of rapid change, today’s market also includes “a tremendous opportunity” for advisors, he said.
“Financial advice is having a moment,” McNabb said. “The rise of more technology-based solutions has made advice part of a national conversation in the financial press and in the popular media. The best advisors are seizing this moment to tell their story.”
Overall, there are five critical considerations for advisors, which he highlighted:
Investors now want to pay less for investments, as robo offerings create a new pricing floor. Thus, traditional advisory firms have to provide caring in-person, individualized services that robo-advisors cannot offer clients, he argues.
2. Advisors must adapt to a changing industry.
In the past advisors won clients with good stock-picking abilities.
Since technology can now do much of the portfolio-building work today, advisors should further automate routine elements of their practice, meaning they should digitize and mobilize some of the client experience, McNabb suggests.
3. In some ways, the world is not as complex.
As portfolio construction has become commoditized, advisors cannot use this as a point of differentiation.
4. In other ways, the world is not as simple.
Some clients entering retirement, are looking for very broad advice on topics such as Social Security and long-term care; the demand for such advice is great.
In addition, the questions faced by such clients “are increasingly complex,” he says. “Rules of thumb and single-product solutions rarely provide a complete answer.”
5. Advisors must tell their story.
To differentiate themselves, advisors must explain their value proposition, McNabb explains: “Perhaps this will be No. 1 going forward … the advisors who will be most successful will be those who can absolutely tell their story in the most effective ways.”
This builds on Vanguard’s profile of the most successful advisors “who can add significantly to what clients experience; we call it ‘advisor alpha.’ ”
Advisor alpha means that registered reps have to “be a great behavioral coach, help clients at being tax efficient and keep investment costs low, i.e., by thinking of [costs] as a percentage of returns,” McNabb explains.
--- Check out more coverage of the Inside ETFs Conference.