ETFs have been growing in popularity in recent years and this year’s Inside ETFs Conference offered some great insights into the top ETF and advisory trends for the year ahead.
One of the key topics discussed by subject matter experts from Vanguard, Schwab, and Fidelity (among others) is how the shift toward zero commissions is changing the way financial advisors are guiding their clients.
- The Inside ETFs conference is an annual conference where the leading analysts, investors, and asset owners gather to discuss developments in the ETF industry.
- The 2020 conference focused on the benefits and drawbacks related to the latest push for commission-free trading.
- The head of Vanguard's ETF products noted that, with the increase in the amount and diversity of ETF offerings, analysts need to be vigilant in their research to ensure clients are getting the best value.
Zero-Commission Trading Offers New Opportunities for Advisors
The race to zero commissions has been a big theme over the past few months, and the growing trend toward low-cost ETFs has been one of the key reasons behind it. So it’s no surprise that experts from across the industry are focused on how ETFs will be viewed by investors and advisors moving forward. “I think it’s phenomenal that the commissions have been removed as a barrier to consideration for advisors,” says Rich Powers, head of ETF Product Management for Vanguard. Powers believes that this shift will prove beneficial for advisors since the lack of fees will limit the cost considerations they need to think about.
However, he cautions that the new model—and the multiple ETF offerings that are increasing as a result—means that advisors will need to be more diligent when it comes to researching products. “The idea of doing more homework from a due diligence standpoint is going to matter a lot more than saving yourself one basis point,” he explains, emphasizing that successfully managing ETF investments is about understanding the components of each new ETF product and how they compare to other products in the market.
Fidelity’s Greg Friedman agrees. As head of ETF Management and Strategy, he believes that the most important thing advisors can do is to provide value to their clients. Offering his views on the importance of zero-commission trading, he explains that, “Anytime you can bring value, it's the right thing to do.”
Advisor-Fee Models Are Likely to Change Along with Brokerage Models
But while zero commissions can offer significant opportunities for advisors, they can also present some challenges. These include the need to demonstrate consistent returns to clients, as well as the need to re-evaluate advisor-client fee structures. Dave Nadig, chief investment officer and director of research at ETF.com, believes that one of the likely outcomes is a shift toward fee-only advisory models.
According to Nadig, one of the key reasons for this is that the lack of commissions is going to make it easier for clients to scrutinize the other costs associated with advisory services. “I think it’s going to put some focus on the core revenue model for the advisory business,” he explains, emphasizing that this will likely change the way advisors price their services, and the value they’re able to provide. “I think a fee and retainer model is the way that the business is going to go—not tomorrow, not six months from now, but over the coming years I think we’re going to see that.”
The Bottom Line
Despite varied insights on top ETF trends, the experts we spoke with all agreed on the importance of the client experience. “Within asset management, the way we're approaching it is, 'How do we create outcomes for our clients that allow them to achieve the experience that they're looking for, rather than just putting a whole bunch of widgets in front of them?'” says Shanna Weber, VP Asset Management Strategy at Schwab. This is especially important since Schwab has led the race to zero commissions, yet it still generates 30% of its revenue from financial advice and other client services.
Weber believes that providing a holistic experience that takes a client’s individual needs and goals into account is the key to successfully maintaining advisor-client relationships moving forward. “I do believe we can monetize that because people are willing to pay for simplicity, for guidance, for trust, for self-assurance, and for the ability for them to get the outcome they're looking for.”
While there are likely to be more changes to advisory services in the years ahead, client experience remains a top priority and the cornerstone of a successful practice.