Secrets to Building a Top ETF Firm

What type of tools or technology are you using to help with portfolio management?

Anderson: Our technology vendor for portfolio management is Orion Advisory Services. They are a very responsive partner and have helped us do a great job at constructing and maintaining a GIPS compliant performance composite.

Gayed: We primarily use Fidelity, and execute ETF trades through various algorithms designed to minimize NAV impact.

Fitzpatrick: We are changing our approach to technology, primarily to enable us to change our business model. We are planning to implement a business model that uses ETFs within model portfolios within defined contribution plans. The Invest N Retire patent on this approach caught our eye and we believe the approach is powerful. It changes the balance of power in our industry and gives a small player like us a unique value proposition versus the traditional large vendors. Invest N Retire’s abilities to allocate this week’s payroll deductions to the underweighted assets in a professionally managed model portfolio at the plan participant level, and to calculate account performance at the plan participant level, is powerful. Hudson Canyon’s ability to develop model portfolios using relative strength disciplines with ETF’s is also powerful. The analytical capabilities that Stock Smart and Quant Advisor are developing are promising.

Wolfe: We have created what we call “The Black Box.” It is a gigantic Microsoft Excel program that we use to pull and sort all the data sources together and ultimately score each ETF. Some of the other tools we use are Thompson/Baseline for mining our proprietary fundamental and technical research, S&P Marketscope for their ETF analysis, Dorsey Wright for their Technical research and Morningstar for their ETF research.

Name one marketing savvy tip that has contributed to the success of your business.

Anderson: Complete transparency into our process and performance has helped us with credibility. Our chief investment officer, Herb Morgan, does a weekly narrated commentary, which is published via our website. This has helped the advisors and their clients stay in touch with the inner workings and research process of our investment policy team. In addition, we publish performance numbers every month to the front page of our website for public consumption.

Gayed: We no longer live in a solicitation world. We live in a search world. Be visible.

Fitzpatrick: The advice to build a new mousetrap by combining several unique features based on new approaches to old problems gave me the courage to try.

Wolfe: When we first got into the business of marketing ETF portfolios we confronted a lot of headwinds. Advisors who were either doing their own portfolio management or believed they could put a few ETFs into a portfolio and call it a day. Either way, they didn’t need us. We also ran into, and still do, many advisors and institutional investors that needed to be educated on the product. Some who were just beginning to open themselves up to the use of ETFs and some others who were trying to grasp the inner workings of an individual ETF itself. This business is still in its infancy. Simply believing in the product and being persistent through thick and thin would be my simple marketing tip.

Looking ahead, where do you see the biggest growth opportunities for ETF focused advisors?

Anderson: The next biggest opportunity, but even possibly more substantial from an asset flow perspective, is the role ETFs are playing in the retirement plan space. With open architecture firms like Verisight and trading platforms like Mid-Atlantic, I believe we’ll continue to see more plan sponsors gravitate towards ETFs due to the lower cost and enhanced selection of asset managers and their advisor counterparts who now have a great opportunity to deliver a fiduciary based solution at a lower price point.

Gayed: Tactical asset allocation using ETFs likely will have growing appeal as individuals and advisors look towards diversifying away from mainstream stock and bond concentration risk. Volatile stock markets and rising yields will make holding “all the risk” all the time, a difficult strategy. Rather, the future investing environment will likely be about holding the right risk and the right time.

Fitzpatrick: The ETF’s combination of focus and diversification makes them powerful building blocks for designing portfolios. We are trying to build a business by using ETFs to attack what we see as the biggest problem the country faces: the fact that millions of Americans face retirement without enough savings. If we can increase savings, improve returns and cut costs, we just might be able to build a business! The politics of addressing this impending crisis will be nasty. Expect more government intervention into the retirement business.

Wolfe: The business of providing ETF portfolios as an advisor or simply using ETF’s as a part of your practice is in its infancy. Other advisors are just beginning to understand the benefits of their use. The fact that becoming an independent advisor is growing and many of these advisors are becoming more comfortable with the idea that they don’t want to be a client’s portfolio manager, but would rather outsource that function and be the asset gatherer and trusted Advisor. This opens the door to firms that want to focus on the actual ETF managed Portfolio function. Another area that may take a bit of time but would be a huge benefactor of managed ETF portfolios is the 401(k) market.