We Wealth | April 2021

Vanguard has recently opened its doors in Milan. It was, to be fair, an act of mere formality. The city had already been seduced by the American giant of ETF investing with its ambassador Simone Rosti.

A lifetime has gone by since ETF investing reached Italy for the first time. Seen as mere index replicators, ETFs were at once marked as second-class products, unable to size the opportunities of the market.

Financial advisors and private bankers could barely stand them, as they represented the negation of financial consultancy: in fact, designed as basic products, the did not allow for the remuneration of consultancy work.

Since then, the collapse of the rates raised the level of attention towards the cost of investment products and their quality. Therefore, it is time for redde rationem for expensive active managers unable to beat the index. The world of financial consultancy and private banking realized this early on. 

To make matters worse, active ETFs have recently reached the market. As the name suggests, active ETFs are a true antinomy and, at the same time, a godsend for financial consultancy: performance at the right price. 

On the lookout for revenues for their clients and, at the same time, dealing with cost control, financial networks see ETFs as the perfect ingredient (but not the only one) to include among the services of advanced financial consultancy. 

In other words, in a time of zero rates and before anyone else did, financial networks and private bankers have realized the importance of offering a fee only service of financial consultancy in which placement commissions are not charged to clients, who pay only for the financial consultancy service. 

In this context, ETFs, both active and passive, have become a true blessing. They are used as stand-alone products or together with other products in asset management and, in general, in the asset mix of clients on the lookout for quality financial consultancy at the right price. 

The ETF trend is irreversible: today, not one single international active manager disregards ETFs (Amundi, Invesco, Goldman Sachs, JP Morgan, Fidelity, Franklin Templeton). However, at a global level, the market is controlled by three giants: iShares BlackRock, State Street and Vanguard.  

From Vanguard, the world expects a true revolution of the distribution system. In the US, where the company was funded by the philanthropist Jack Bogle, thanks to its reputation of honest business able to reduce the costs borne by end customers, the company has disintermediated the distribution system, reaching the end customer directly and overturning many competitive advantages. 

The Italian market certainly cannot be compared to the US market. However, financial consultancy, financial advisors, private bankers as well as bank managers will have to deal with ETFs more and more often. Especially since they have been able to identify an important and irreversible trend, ESG products. 

It is no accident that – in addition to harvest data – the propensity of financial advisors to include ETFs in portfolios suggested to their clients has tripled over the last four years, from 16% in 2017 to 48% in 2020 (source: FINER® CF Explorer).

So, the story of ETSs recalls the story of Cinderella, who became a princess with all due respect to her envious sisters. 

Nicola Ronchetti