ETFs and financial consultancy: a new-found chemistry

Investire | October 2020

In Italy, ETFs were met with suspicion. Active managers considered them second-class products – in their opinion, ETFs could not make use of the many opportunities offered by the market (for example, going contrarian); on the contrary, they could merely take advantage of the work of others, without much effort.

At the start, financial advisors were not among the fans of ETFs. Firstly, because ETFs were, in a sense, the very antithesis of financial consultancy, mere replicants which track a benchmark without adding any value. Secondly, because their basic nature did not allow for retrocessions that may reward the consulting business or the distribution costs. 

However, in just a few years everything has changed: a sad Cinderella of the market, ETFs are now the shiny princess of the world of financial consultancy. 

There are several reasons for this transformation. First of all, the collapse of interest rates to zero and below has drawn attention to the cost of investment products and their quality. In other words, there used to be several more opportunities for financial consultancy in the market when interest rates had not dropped to zero or below. 

On the other hand, today a very small number of active managers can offer a benchmark-beating performance. However, high-priced performances that do not beat the benchmark have no future and the world of financial consultancy is fully aware of this. 

Moreover, today there are actively managed ETFs, a true antinomy. Standard ETFs are passively managed tools designed to closely track a benchmark. On the other hand, actively managed ETFs (born in the USA before spreading to Italy) intend to outperform a benchmark. 

Actively managed ETFs, just like the majority of traditional mutual funds, promptly adjust the composition of the portfolio – they adapt the weight of each asset class (shares, bonds, feedstock etc.) and the range of geographical areas, sectors etc. included. This is a boon for financial consultancy: high performance at the right price.

ETFs have become one of the preferred tools of financial networks, committed as they are to making profit for their clients while containing costs. Indeed, financial networks were among the first to understand the importance of fee-only consultancy.

Thus ETFs (both actively and passively managed) have become a true blessing, if not as stand-alone tools, certainly used in combination with other products. They are employed in the field of asset management and, more generally, within the asset mix of clients who look for high performance at the right price.  

ETFs are not simply a trend – in fact, today all international active managers include ETFs in their offer: Amundi, BlackRock, Goldman Sachs, JP Morgan, Fidelity, Franklin Templeton, to name but a few.

ETFs are going to revolutionize the distribution models as well as the concept of financial consultancy itself. One example: in the USA, Vanguard disintermediated the distribution system addressing end investors directly, thus producing an altering effect on competitive advantage. 

Financial consultancy as a whole, financial advisors, private bankers as well as bank managers shall get increasingly familiar with ETFs, together with one of today’s most influential trends: ESG products. 

Today, ESG ETFs represent an ever-growing reality in the world of financial consultancy. In fact, those who promote ESG ETFs are aware that the ESG approach is not a passing phenomenon, but a true cultural change which is going to impact the future of its detractors. 

Together with the evidence gathered so far, the exponential growth in the number of financial advisors inclined to include ETFs in the portfolios suggested to their clients only confirms their success: 16% in 2017, 27% in 2018, and 34% in 2019 (source: FINER® CF Explorer).

Better late than ever. In any case, this is going to be a good challenge for financial consultancy.

Nicola Ronchetti