Canadian Financial Advisors, it’s time to get serious about ETF’s. The global acceptance of ETF’s is growing very rapidly, and this represents a major risk to the recurring compensation of Canadian Financial Advisors who are not securities licensed because most ETF’s don’t pay trailer fees…the few that do pay a tiny trailer compared to mutual fund trailers.

In fact, ETF’s are also a threat to the transaction-based compensation for Brokers, too…as a client, why would you bother to buy 4 to 6 stocks in a sector that are rated “outperform” by the Brokers’s research department, when you can simply buy one ETF that covers the whole sector and eliminates single security risk?

When Brokers start putting ETF’s in their own Fee-based accounts, they will have a distinct pricing advantage over actively managed mutual funds…by as much as 100 bps…and MFDA and Insurance-licensed Advisors will start to lose market share rapidly.

A recent post on Seeking Alpha summarizes the growth of ETF’s as a % of trading on the NYSE as well as a % of mutual fund assets. 

Click here for entire article

While the % of mutual assets in the US appear at first glance to be small (and thus potentially nothing for advisors to be worried about) a couple notes need to be added:

• The recent and projected growth rates of ETF’s is a steep curve…we’re headed up the shaft of the proverbial “hockey stick” chart, which means the trend is just starting to gain momentum, and the trend is your friend IF you’re riding it.
• These projections are based on ETF growth and relative AUM figures in the U.S. where mutual fund fees are much lower than here in Canada, which has the highest mutual fund fees in the industrilaized world. Thus, Canada’s mutual fund industry – and the advisors whose trailer fees contribute to Canada’s high MER’s -  is at much higher risk than the mutual fund industry in the U.S.

This should be very concerning for MFDA and Insurance -licensed Advisors. Invesco Trimark has recently introduced its own version of ETF’s in a mutual fund wrapper (to be addressed in future blog posts), but this is only one option for MFDA advisors to offer their clients…and Insurance-licensed advisors are still out in the cold re: ETF’s from the mainline investment management companies.

There is one other 100% ETF-based investment solution available to both MFDA and Insurance-licensed Advisors that keeps the total MER to the client at a reasonable level (lower than comparable mutual funds), keeps the advisor’s trailer fee at 1% annually(paid monthly), and has the most important added benefit for clients and advisors: active management to nimbly protect and grow accounts even in challenging markets.

Click here for info on actively managed ETF-based portfolios.

Cheers,

Andrew Ruhland, CFP, CSA

Client Centered Advisors