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Vanguard’s Brennan: Embrace Innovation, Beware Proliferation in ETFs

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The Vanguard Group’s Chairman Emeritus Jack Brennan says now is “the best time ever” to be a financial advisor, and ETFs are one of the key reasons.

“Using products like ETFs, which take so much of the mechanics of investing out of your hands allow you [time] to build your business,” Brennan said to an audience of financial advisors at IndexUniverse’s Inside ETFs Conference in Hollywood, Fla.

Speaking to a receptive audience of ETF aficionados at the InsideETFs conference in Hollywood Florida, Brennan’s tribute to the investment category was pronounced.

“This is one of the few great and disruptive products in the investment industry,” a distinction the chairman emeritus reserves for just a few products like tax-advantaged municipal bonds and money-market funds.

The son of a career banker, Brennan noted that his father hated Fidelity cash reserves, another innovation that disrupted his father’s business, since customers would withdraw their savings and move them to Fidelity for the higher rates.

“How many people got introduced to investments by money-market funds?,” Brennan said, joking that today the Wall Street Journal’s investment section is really an ETF section “plus a couple of comments on mutual funds.”

According to Brennan, the power of ETFs resides in the ability to get a tax-efficient, diversified and transparent investment at a rock-bottom cost.

“For 19 basis points, you get the Harvard endowment,” he said.

It’s that value proposition that will fuel ETFs’ future growth, he added: “It’s 1.3 trillion in assets today; it’s going to be $2 trillion in the blink of an eye.”

The Vanguard chairman emeritus cited the role of advisors, index construction, vendor support for advisors and ETFs’ low cost as factors influencing wider ETF adoption.

He praised the role of competition among the biggest ETF vendors in driving product excellence. “It’s fabulous to see value directed to the right place,” he said, referring to end consumers’ low prices.

While Brennan celebrated ETFs’ creative disruptiveness, he warned advisors that they need to distinguish between genuine innovation and mere proliferation.

He cited the example of the mortgage industry, which introduced “no-doc” and “ninja” (no income, no job, no assets) loans, which increased loan volume but ultimately had devastating impact on the mortgage industry.

The ETF industry should therefore eschew seemingly innovative products that could hurt investors.

One product development that might fit that category, Brennan suggested, was actively managed ETFs.

“The idea of an actively managed ETF sounds like an oxymoron to me,” he said. “It’s counterintuitive. One of the reason you index is take manager risk out of the equation. To put manager risk back into the equation makes no sense to me.”

Brennan expects actively managed ETFs will gain market share, but could hurt clients.

Despite this worry, the Vanguard exec was upbeat about the difference advisors can make.

“This is the best time in history to be a financial advisor,” he said. “The tools you have in your toolkit have never been better … the firms you deal with have never been better.

Competition in the investment management business is ruthless. And the best quality firms win.”


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