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ETF Investors Need Advisors' Help: Inside ETFs Panel

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A group of leaders in the ETF industry say that as these financial products evolve and become more complex, the role of advisors is more significant than ever.

ETFs continue to put “industrial-strength institutional tools” in the hands of individual investors, “who need advisors to help them,” said Rory Tobin, the head of State Street’s global SPDR ETF business, during a panel discussion at the Inside ETFs conference taking place near Miami on Monday.

Since the financial crisis of 10 years ago, “There’s been a democratization” of the fund business, with more and more individuals and businesses able to do tactical asset-allocation work at low fees, according to Dave Gedeon, head of research and development for Nasdaq.

Pushing this growth is the fact that many funds fail to beat their respective benchmarks. Combine this with the “plethora of choice” in ETFs, and it’s hard not to argue that there’s never been a better time for advisors in terms of the strategic and tactical asset-allocation models at their fingertips, Gedeon said.

“It’s no longer just about a 60/40 [stock/bond] portfolio with some international product and a fee added,” he said. “But there are always two sides to a trade [with ETFs], so you have to pay attention. That’s why the advisor as fiduciary is important — to help clients make choices.”

It’s not easy for investors to keep up with all the trends and information in the marketplace. “Some people still do not know what Bitcoin is,” Gedeon added.

Still, he says, having more exchange-traded products means there are “better opportunities and outcomes” for investor clients and advisors alike.

Pros, Cons

As members of the panel agreed, with new products such as leveraged funds come new risks, and this means makers of such products need to ensure that the risks are clear and fully understood by investors.

“We want to give choice in a responsible way, and we want people to have the right portfolios and products,” given their risk profiles and other characteristics, said Sanjay Arya, Morningstar’s head of indexes.

“It’s about educating investors and getting them to understand what is in the products,” Tobin said. “In the past, some have not understood what they were buying, and we had to back away from [such ETFs].”

While some sophisticated leveraged instrument might make sense for an individual, others might not. “We want to know why you are taking that position, since we want responsible choices and outcomes an investor.”

For many investors, broad bond, domestic equity and international funds work just fine. But what about younger investors who want to do more speculation?

“There are packaged solutions, and advisors do that. They can also help people with behavioral insights, so they don’t panic,” said Rodney Comegys, head of Vanguard’s Equity Index Group.

Many investors can have nearsightedness when it comes to the markets, he points out. And with the spread of robo- and hybrid advisors, advisors have a role to play in helping clients by coaching them to “keep their focus on the long term” and to remember the role that ETFs play within their larger financial plan.

Liquidity, Volatility & Customization

The industry also faced challenge tied to liquidity in volatile times.

“In times of low volatility, people focus on the … cost proposition of ETFs,” Tobin said. “But in times of more market volatility, people want to see liquidity, and trading volumes kick up dramatically.”

In such a context, investors are taking a hard look at liquidity, the total cost of ownership that includes the ease of trading — not just a fund’s expense ratio.

Many investors are asking, “How quick can I make a risk on/risk off trade and what is bid-ask spread? There was about $11 trillion in turnover for SPDR ETFs last year,” he explained.

Looking further out, Comegys says, advisors can add value via helping clients by building model portfolios and customizing full portfolios: “For individual investors, this is where cost and competition will come in the next 10 years.” Alpha-focused discussions are becoming a thing of the past, he adds.

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