How ETFs Can Help Address Changing Client Expectations

Across Europe, we’re seeing evidence that exchange-traded funds are playing a more prominent role in investors’ portfolios. However, Jason Xavier, Head of EMEA ETF Capital Markets at Franklin Templeton, still encounters advisers who remain unconvinced of the merits of ETFs. In this article, he argues that ETFs have a central role to play for the investors of tomorrow.

At a recent forum, I asked a room of wealth managers about their usage of exchange-traded funds (ETFs). Around a half said they used ETFs in their offerings.

Among the other fifty percent not offering ETFs, the sense seemed to be: “We don’t use ETFs because our clients don’t see the need for them.”

We think that may be a short-sighted way of thinking because it fails to recognise the way that client demographics and attitudes are likely to change over the coming years.

Our view is that the 50% of people in that room who reported they do offer ETFs are going to be the ones with a business in 15 years, while the 50% who don’t may struggle.

Why ETFs?

Why do we think wealth managers should include ETFs in their offerings?

There are some well-rehearsed answers that should be familiar to many veteran investors: cost and liquidity make ETFs attractive.

But, there’s another factor that’s easy to overlook: ETFs’ cultural fit.

Over the next 30 years, the wealth transfer from the baby boomer generation to millennials that will occur across the developed world is staggering.

New Generation, New Expectations

The investment decision-makers of tomorrow have grown up in a digital world.

Many of their day-to-day interactions are played out via their mobile devices. We believe the desire to understand the world second-by-second in an instant will spill over to their investments.

ETFs offer end-investors executable transparency, freedom and access that we think should appeal to the younger generation. In particular, intra-day pricing, trading and downstream monitoring play to the needs of younger investors.

The world of photography offers us an interesting analogy: many youngsters brought up with digital cameras on their mobile phones find it hard to imagine a time when people had to wait days to get their holiday photos back from the chemist.

Similarly, in our experience, many millennials can’t believe that to buy a fund they have to wait until the end of the day for the trade to execute. Likewise, they are surprised that when they sell a fund, they have to wait two days before the money hits their account.

The younger generations want the freedom to act on their convictions instantaneously with a certain independence. These individuals will also be the next generation of financial professionals, including chief investment officers and chief risk officers. We believe these upcoming professionals will see the opportunity to harness the benefits of ETFs and create investment solutions spanning active, smart beta and passive investment styles to meet clients’ investment goals and objectives.

As digital natives, they’re very likely going to be looking at instantaneous technology-driven solutions or products that can provide them with immediate access.

We believe that by offering transparency, liquidity and accessibility, ETFs can help fill that need and therefore should be considered at the core of many wealth managers’ strategic plans.

View Jason Xavier’s previous articles here.

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The comments, opinions and analyses are the personal views expressed by the investment managers and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

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What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.