On June 24th, I had the privilege of participating in the inaugural Canadian S&P Dow Jones Indices ETF Masterclass conference on the topic “ETFs as a Catalyst for Canadian Advisory Growth”. While conversations orbited the general themes of ETFs and indexation, panelists and speakers touched on many topics Advisors are, or should be, thinking about as we approach a time of profound change in wealth management.
In recognition that Advisors’ time is valuable, and that many Advisors who might have been interested in attending the conference were unable to be there, I thought it might be useful to share the messages my colleagues and I thought were most surprising and important.
- Beth Hamilton Keen, CFA, Incoming Chair of the CFA Institute Board of Directors, shared a recent study that showed asset management ranking last, behind bankers, auto salespeople, and insurance brokers, in terms of perceived integrity. When prompted, the public pointed to a lack of ethical culture within financial firms as the primary source of concern. The CFA Institute, and other similar organizations like fi360, are rallying behind a proposal to “Put Investors First” to help the wealth management industry earn back investors’ trust. CRM2 regulations in Canada and proposed fiduciary standards for advisors in the U.S. are consistent with this objective. Advisors who continue to subordinate client needs to quarterly sales targets risk legal consequences and eventual obsolescence.
- There is a creeping recognition that the active managers Advisors have counted on for decades to help them differentiate their practice have not delivered. Clients are increasingly familiar with the low-cost, passive nature of ETFs, and are expressing a preference for Advisors who can speak intelligently about how to incorporate them into portfolios. Slowly but surely, Advisors who have no index/ETF based offerings are likely to find clients abandoning them for Advisors who do. Raymond Kerzérho, Director of Research at PWL Capital, discussed how his firm constructs globally diversified passive portfolios of ETFs to help take the emotions out of the investment process. Deborah Frame, VP and Portfolio Manager at Dundee Global Investment Managed described how her firm is taking an active approach to asset allocation through ETFs.
Panelists generally agreed that the proliferation of ETF offerings covering every corner of the equity, fixed income and alternative asset space represents an opportunity for those equipped to assemble products into coherent solutions. In some ways, it’s never been easier to build a diversified global portfolio. On the other hand, some advisors acknowledged that the ‘paradox of choice’ might lead to ‘paralysis by analysis’ as clients and advisors alike struggle to keep up with all the new offerings.
- There was a grudging agreement among all but the most die hard ‘pacifists’ (i.e. zealous passive investors) that a potential low return future across most asset classes would require a more active approach to asset allocation in order to meet client needs. Robyn Graham from Hahn pointed to her firm’s track record of navigating major global macroeconomic trends with diversified ETF portfolios to suit different client preferences. Deborah Frame presented a compelling case for quantitative approaches to asset allocation, which is well supported by research from firms like AQR. James Morton highlighted some unique ‘quirks’ about ETFs that can trip up inexperienced advisors, and reminded everyone of the large and growing reporting burden for foreign holdings.
For our part, I explained how our product lineup is a continuum extending from the truly passive global market cap weighted portfolio at one end, through risk parity type and approaches, to pure tactical solutions at the ‘active’ extreme. I also made the point that portfolios can benefit from non-correlated strategies, such as CTA funds, for so-called ‘tail protection’ when things get ugly.