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July 01, 2010 at 08:00 PM
The European landscape of ETFs looks much different than the U.S., partly due to the lack of a fiduciary duty to clients among advisors there.
Returning from the recent Inside ETF Conference in Amsterdam, I feel like I have completed a whirlwind review of exchange-traded funds.
There are some structural issues in the eurozone markets that make ETF adoption slow. An evening with an Italian trader opened my eyes to the roadblocks to the fiduciary duty, which I believe will be the largest contributing factor to ETF success and usage. We discussed how fee-only advice could start in Italy. He said that it was very difficult to start your own business. So hard, in fact, that a failed business owner declaring bankruptcy could go to prison.
While I haven’t independently confirmed Italian bankruptcy law, it’s clearly a problem if an intelligent and professional trader perceives the risk of starting a business or breaking away from a brokerage house the same way he would view robbing a bank.
In the U.K., the government has passed a new directive to make its financial institutions consider all investing opportunities for clients, not just their own financial products. This is going beyond suitability and is a good step toward a fiduciary standard. This is an open door to more ETF usage in U.K. portfolios.
The independent fiduciary fee-only platform is lacking in Europe, thus most advisors there are pushing high-cost and high-commission insurance-based products to their clients.
Europe has some unique structures including multiple trading platforms, OTC trading for ETFs, and physical and synthetic ETFs operating under the guise of being true ETFs. I think these challenges could be overcome through education and research, separating the good from the bad.
However, I believe that the largest hurdle to ETF adoption in Europe is the retail advisors’ lack of fiduciary responsibility.
So far, institutions trade the majority of Europe’s ETFs. Even at the Inside ETF conference, the majority of attendees were institutional managers, traders, and lawyers. This suggest that ETFs have really not made it to the individual European investor. Next year, should I be invited back to the conference, I would hope to see more retail advisors. At similar conferences in the U.S., advisors would make up the majority of attendees.
