Roboadvisors and ETFs: Product with built-in distribution channel?

ETFs and Robo-advisors

Respondents to EY’s latest yearly survey (pdf link) of the global exchange-traded funds (ETFs) and products sector think highly of the tie-in with automated investment advice platforms (roboadvisors).

On the distribution side, managers and promoters of ETFs recognize the need to invest in a dedicated salesforce to drive sales of the investment product. But there’s been a demonstrative surge in interest around digital distribution channels.

ETFs and digital distribution

According to the report’s authors:

Even so, there is a particularly strong sense that the digital dawn could be a “Eureka” moment for the retail take-up of ETFs. After all, the product and the technology share some common themes: low costs, transparency and breadth of choice. Of those surveyed, 90% view digital channels as an area of opportunity, and 89% expect robo-advisors to accelerate the growth of the industry.

Respondents see a powerful tie-in with traits jointly shared between roboadvisors and ETFs. It’s this overlap that’s concerning to some some experts in the industry who don’t see robos as a new manifestation at all. Rather, according to this viewpoint, it’s just an old financial product (ETFs) with a new distribution channel (roboadvisors).

According to Investment Advisor Magazine‘s Editor-at-Large, Bob Clark:

This suspicion was confirmed in a conversation I had the other day with Babara Roper, the Consumer Federation of America’s director of investor protection. In response to the criticisms of robos that I wrote about in the above mentioned blog (conflicting sources of revenues, self-dealing, and low standards of client care) she said: “Well, how’s that any different from the rest of the financial services industry?”

With the notable exception of independent RIAs, it isn’t any different. And that’s my point about robo “advisors.” They don’t represent a “new” entry into the financial services industry. They are merely a digital delivery system for the old financial services industry, rife with all of its conflicts and client abuses.

Owning the digital distribution channel is already top of mind at firms like BlackRock, the financial firm which owns the massive ETF provider, iShares. In August 2015, BlackRock announced it was purchasing FutureAdvisor, an aspiring roboadvisor that hadn’t quite reached the AUM of larger competitors, Wealthfront and Betterment.

While BlackRock has made it clear it has no plans to market to individual investors via its new roboadvisory offering, it certainly is planning to move its own iShares products through FutureAdvisor.

Instead the firm hopes to use FutureAdvisor to enable banks, brokerage firms, insurers and 401(k) plans to use the company’s digital platform to serve mass affluent investors and millennials, Frank Porcelli, head of BlackRock’s U.S. wealth advisory unit, said in an interview.

By pivoting FutureAdvisor into a B2B play to other financial institutions that market to the end investor, BlackRock will provide a built-in distribution channel to distribute iShares directly to clients of the wealth managers it services.

Schwab has had some very public early success with its Schwab Intelligent Portfolios (SIP) offering. Schwab just reported that its own competitive product to roboadvisors had grown AUM +37% quarter over quarter. SIP now boasts over $5B in AUM in just 2 quarters of operation. That means shortly Schwab’s AUM will approximate all the assets under management in the entire roboadvisor industry. Some of the criticism of Schwab’s Intelligent Portfolios has centered around the bias that the online broker has towards using its own ETFs.

Regardless of who emerges as the largest competitor in the digital advice space, ETFs are the ultimate winner.

 

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12 most mindblowing acquisitions in recent history

ey on asian fintech, jan bellens

Interesting discussion going on at 12Most regarding the most mindblowing acquisitions in history.

Obviously, the fervor around Facebook’s intention to buy photo app, Instagram for $1B prompted this list but I thought it would be a good time to get your feedback into what you think were the most influential mergers in the financial space.

To get things started, I added the $15 billion BlackRock-Barclays Global (BGI) merger which essentially made BlackRock the largest asset manager on the planet but also gave them the crown jewel in the ETF space, which just keeps growing like a weed.

What do you think are notable mergers in our space?

Vote or add your picks below:

ETFs, overindexing and the power of financial brands

Just doing some thinking about the growth and future of the ETF industry:

In my eyes, ETFs began as a second-generation of mutual funds with the following characteristics:

  • Passively managed: ETFs were passively managed (though that’s changing), building upon Jack Bogle’s success at Vanguard.  Most research at the time clung to the Efficient Market Hypothesis and academics declared that trying to beat the markets was a fool’s game.  ETFs were this vehicle.
  • Cheap: They were cheap.  If theory shows that you can’t pick stocks and win the game that way, better to index and reduce fees for better long term success.  ETFs’ passive structure enabled fund sponsors to get big and compete on price, driving prices further downward.
  • New access: Beyond their philosophical underpinnings and reduction in asset management fees, ETFs also opened doors to new asset classes (commodities), markets (Peru), and strategies (leveraged short funds) that weren’t easily accessible or understandable for retail investors previously.

Things are a’changin

Things are changing.  With Blackrock’s purchase of Barclays Global Investors iShares (BGI), ETFs are no longer seen as a pure threat to the much larger mutual fund industry.  Diversified asset managers like Blackrock and PIMCO, mutual fund firms like Vanguard and Fidelity, and online brokers like Schwab are building and buying ETFs as part of a larger smorgasboard of choices for their clients.  ETFs fit in like precious metal and international funds into a firm’s offerings.

In a sense, ETFs have now become purely productized, competing against similar strategies in different structures.  Contributing to this trend is the fact that numerous ETF offerings targeting the same strategy/geography have all hit the market. With multiple offerings for almost every market and strategy in ETF land, overindexing has blurred any and all distinctions in investors’ minds about which securities to select.  Instead of doing the work to pick the most appropriate security, brand will ultimately trump other things.

While there may be 3 general, broad ETFs for investors to get Chinese market exposure, most retail investors have no idea that they’ve been structured differently, that the compositions of the indices these ETFs track are wildly different and have led and may very well lead to different performance outcomes.

Brands, brands, brands

What this means, then, is (like most things in life), competition in the ETF space gets muddled.  ETFs compete against mutual funds every bit as much as they do against each other and with this backdrop, the emergence of the firm’s brand will trump performance and index structure.  Index composition or the race to build a better mousetrap becomes less important.  Branding will sway investor decisions and assets away from the smaller, more innovative players, towards the larger, stronger brands.

Like everything commercial, brands wield power.  So true in the financial sector as well.