From the May 2017 issue of Investment Advisor • Subscribe!

One More Reason ETFs Are All About the Fees

Make sure one thing clients pay for is manager experience

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Look for exchange traded funds with experienced management teams. Look for exchange traded funds with experienced management teams.

Regular readers of this column will correctly assume that the title is merely tongue in cheek. While advisors should consider a multitude of factors when assessing client allocations, they are best served by taking an active approach of selecting the best-determined strategy regarding its investment objective and performance, and not just the cheapest product. An active approach, of course, can be utilized through traditional stock or bond picking, or using beta — all deliverable through ETFs — to express active investment decisions.

Subscribers to this publication likely don't adhere to a set-it-and-forget-it investment approach but rather look for actionable insights that can help their advisory practice. While fees represent part of the decision-making equation, an ongoing commitment to greater education beyond that one element remains paramount when understanding and evaluating ETFs.

With the continuous growth of new companies entering the ETF space, recurring and new factors consistently emerge for advisors to consider in evaluating portfolio management firms and their respective ETFs. Advisors serve as crucial supporters for both new managers and new ETFs, not for the sake of innovation within the financial services industry but after conducting considerable due diligence prior to investing their clients’ hard-earned investment dollars. As well-established mutual fund firms make their expansion into in the ETF arena, a discerning advisor must determine, rather than assume, whether any such investment firm stands capable of translating its success into managing ETFs, too.

Experience Matters

ETF experience remains important. The good news stemming from many of the mutual fund firms heading into the ETF space: Experienced ETF professionals who previously earned success and carry industry accolades from their prior experiences at other ETF firms stand firmly at the helm. Such backgrounds present both valuable and critical components when introducing new ETF strategies to the marketplace.

Even as larger mutual fund firms migrate toward ETFs, a careful review of the principals leading their firms’ efforts yields worthwhile consideration. Big firms can utilize large amounts of capital for marketing; but when dealing with the various operational and compliance requirements, advisors should desire a comfortable level of confidence that reinforces the requisite professionalism and the avoidance of mistakes. Such operational attributes prove critical for a successful ETF.

Already, a considerable number of mutual fund firms have recognized this significance, electing to acquire smaller, independent ETF firms for much higher valuations than a typical asset management firm. The largest, most-reputable asset management firms value such experience, and advisors should adhere to similar principles when evaluating ETFs — both at a manager and strategy level — to use on behalf of their clients.

Leadership Matters, Too

In addition to the executive leadership, advisors should review the entire ETF management team — specifically, the operational and compliance personnel that support a firm's ETF business line. While anyone can pay for an ETF-specific compliance manual, properly dealing with the unique attributes of ETFs’ operational and compliance needs is a daily task that requires the ability to properly address unforeseen variables and potentially adverse events. While certainly not the norm, the experience of a capable team exhibits its true worth and ability when dealing with situations such as a “flash crash” or a power outage at a major software provider. At the end of the day, experience counts, and placing your clients’ assets with any ETF firm, regardless of its size, should follow the same criteria.

While such items as these can be taken for granted by advisors, requesting a call with the operational management team represents a reasonable avenue to gain a greater comfort level when evaluating a new ETF for your clients’ investment allocation. Of course, fees matter and should be reasonable, but they should also be based on the manager's comprehensive skill set and expertise, as any well-educated advisor who employs ETFs already knows.

--- Read RIAs Now the Biggest Driver of ETF Asset Growth: Broadridge on ThinkAdvisor. 

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