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Managed ETF portfolios provide a highly liquid, transparent and cost-effective solution for advisers who wish to delegate part of the investment management function. It’s worth noting that, in the US, where managed ETF portfolios were born, larger advisory firms now spend over 90% of their time with clients rather than managing investments (source: Cerulli Associates). This increased client focus has led to a deeper understanding of client needs and concerns, and consequently to increased assets-under-management and client referrals.
Managed ETF portfolios are actively managed, broadly diversified portfolios made-up only of ETFs. The portfolios are professionally managed by asset management firms with the qualifications and experience to carry out the asset selection and risk management on an ongoing basis.
The benefits to advisers of using managed ETF portfolios include low costs, instant diversification, high liquidity, transparency, ease of explanation to clients and ease of implementation (often as a “turnkey” core portfolio solution).
Fund selection is carried out by the majority of advisers these days. This delegates most of the investment management function to specialists, whilst the adviser controls the mix of funds, often with a core / satellite approach.
However choosing and monitoring traditional funds is also time-consuming, and may not be cost-effective. For the core portfolio, many advisers hand-pick the best-in-class funds in each area of the core, i.e. equities, bonds, commodities etc. Within equities, they will often choose a different fund for each major region e.g. North America, Europe, the Far East etc. Whilst less labour-intensive than choosing individual securities, hand-picking a high number of funds and monitoring their performance also takes a large chunk out of the adviser’s time.
In a recent interview with Morningstar, Vern Sumnicht (CEO of iSectors) states: “If approximately 50% of advisors are now outsourcing investment management combined with ETFs growing by a rate of 40% each year, it stands to reason an advisor conducting his investment management solely in-house still picking individual mutual funds will not be competitive in growing their business. Advisors of this breed will simply not have the amount of time as their competition that chooses to outsource to develop or maintain relationships with clients.”
So how to choose amongst asset managers? This is where managed ETF portfolios can be highly attractive. By using ETFs as the building blocks of the core portfolio, advisers and their clients benefit from some of the most low-cost, liquid and transparent instruments available. So-called “managed ETF providers” such as Swiss-based Secure Wealth Management (who have a partnership arrangement with BlackRock), are specialists in ETF selection as well as portfolio and risk management. Pricing of the active management is a key consideration, advisers should look for competitively-priced annual management fees (probably not more than 50bp per annum) and a multi-year track-record.
With many thousands of ETFs available and dozens more being launched every week, the first challenge for any adviser wishing to use ETFs is which one to use for any given investment.
There will be many similar ones available for the same target asset class, country or sector. Managed ETF providers make it their speciality to filter and monitor the universe of ETFs for factors such as cost, liquidity (market capitalisation and daily USD liquidity), average dealing spread etc. These factors are monitored on an ongoing basis so that the managed ETF provider can always use the best available instrument.
Managed ETF providers like Swiss-based Secure Wealth Management, with their partnership with BlackRock, can thus offer an attractive solution to advisers who wish to delegate part or all of the asset management function to professionals. The benefits of this are twofold: one the one hand, the adviser frees up considerable time to maintain and grow his client and revenue base. On the other hand, the adviser’s clients benefit from a professionally-managed, cost-effective and highly liquid portfolio solution which is fully diversified and transparent.
James Dougall is the Managing Director of Swiss-based Secure Wealth Management www.securewm.com
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