I know all ETFs providers are trying to promote ETFs through all ways except through intermediaries. They spent large amount of money in marketing their ETFs through advertisements, talks, sponsoring expensive events and sponsoring articles in magazines to promote ETFs. However, none of them I know of are “promoting” ETFs through IFAs channel. The reason is obvious – ETFs pay no commission. Sometime this is not apparent to the ETFs provider that this is very important to the channel. Two weeks ago, one index provider told me what I think about distributing ETFs through FA channels and I told them that it will be very tough because there is no compensation. It did not occur to them that FAs need to eat and drink! Nevertheless, I feel that more can be done to promote ETFs.

To do this both parties must appreciate why they should move away from status quo. For ETFs providers, they are actually ignoring an even bigger market than the “DIY” market. One unit trust platform provider told me that for every $1 of money invested by a DIY investor, another $1.5 is brought in from the B2B channel. When I refer to “B2B” I am referring to the investment brought in by intermediaries like financial advisers. This is an evidence to show that 60% of the entire market comes from investor who engages financial adviser’s help. This is despite the availability of cheaper but identical products available to anyone from the same platform provider. One reason why the market share of B2B is larger could be because the investor still has to do asset allocation. Sometime, asset allocation is more than an art than a science. Another reason could be because most investors prefer to meet someone face to face than through a faceless portal. Strangely, an IT consultant told me that he doesn’t trust any faceless IT portal despite him being IT savvy! Perhaps due to these reasons, 60% of the investors are willing to pay a higher commission to engage a financial adviser. What this means for the ETFs provider is this: They are ignoring another segment of the market that is potentially 1.5 times as large as the DIY investors they are targeting. It is obvious that ETFs providers are targeting DIY investors only and trying to encourage them to invest in ETFs. Imagine having access to a market share that is 1.5 as large as the DIY investors – this is not trival. Makes business sense?

Before ETFs providers jump on the bandwagon and start visiting FA firms, life is not that simple. The problem is most FA firms are still commission-based. So unless the product pays a commission, they will not recommend it. However, for ETFs provider to pay commissions – they will have to raise the expense ratio of the ETFs. This will defeat the purpose of ETFs. The only reason why passive managed fund outperform active managed fund is due to cost reason. Therefore, it is important that

• Financial advisers go on a fee-basis and away from commissions. It is common knowledge that clients are willing to pay in any amount in commissions in order of ten of thousands of dollars but unwilling to pay even a couple of thousands for a fee-based planning. Although the mathematics is easy to understand, apparently most clients fail their mathematics when come to Commissions vs Fees.
• Financial advisers need to move away from product-sales to a wholistic financial planning. Commissions are earned through product sales but fees are earned for service rendered. Fees can only be justified if there was a service rendered. When a financial adviser cannot justify to the client why he need to charge a fee, this actually means either he cannot justify his service or the client sees no value for his service.  Selling an ETF is itself not a service. It is just another product sale. An ETF is merely a tool in implementing a wholistic financial plan for the client.
• The lack of backend support. Due to advancement in technology, backend support in unit trusts for FAs have become very mature. But there is no backend support for ETFs. Why is this so? Two reasons I can think of: Lack of volume and ETFs pay no trailer fees. If there is no demand, there is no supply. Thus, nobody is willing to invest in backend technology with no assurance there will be demand. Secondly, this is due to ETFs paying no trailers. These backend platform providers rely heavily on trailer fees. The larger the AUM, the larger the trailer fees. These trailer fees come from part of the management fee. Backend support is very important for the financial adviser. Without backend support, the FA will be spending too much time handling paper work and too little time in front of clients & research.

 The lack of availability of backend support is primarily driven by lack of demand from FAs. With all FAs demand for it, backend support will materialize. For FA to demand it, they must charge fee and do away with commissions. To charge fee, they can only do so for service rendered. To provide a service, they must be capable of doing so. Thus the ball is in the court of FA firms that they must improve their competency so that they can render a service. The bulk of “trainings” organized by FA firms and product providers are centers around products. There is so little that centers around skills and competency. With regard to skills, most of the time it is related to selling skills rather than advisory skill. Who than in the industry is able to provide training for advisory skill? I think they are a rare breed.