5 Disruptive Ideas for Advisors

On June 24th, I had the privilege of participating in the inaugural Canadian S&P Dow Jones Indices ETF Masterclass conference on the topic "ETFs as a Catalyst for Canadian Advisory Growth". While conversations orbited the general themes of ETFs and indexation, panelists and speakers touched on many topics Advisors are, or should be, thinking about as we approach a time of profound change in wealth management.

In recognition that Advisors' time is valuable, and that not everyone who might have been interested in attending the conference were able to attend, I thought it might be useful to share the messages my partners and I thought were most surprising and important.

1. Beth Hamilton Keen, CFA, Incoming Chair of the CFA Institute Board of Directors, shared a recent study that showed asset management ranking last, behind bankers, auto salespeople, and insurance brokers, in terms of perceived integrity. When prompted, the public pointed to a lack of ethical culture within financial firms as the primary source of concern. The CFA Institute, and other similar organizations like fi360, are rallying behind a proposal to "Put Investors First" to help the wealth management industry earn back investors' trust. CRM2 regulations in Canada and proposed fiduciary standards for advisors in the U.S. are consistent with this objective. Advisors who continue to subordinate client needs to quarterly sales targets risk legal consequences and eventual obsolescence.

2. There is a creeping recognition that the active managers Advisors have counted on for decades to help them differentiate their practice have not delivered. Clients are increasingly familiar with the low-cost, passive nature of ETFs, and are expressing a preference for Advisors who can speak intelligently about how to incorporate them into portfolios. Slowly but surely, Advisors who have no index/ETF based offerings are likely to find clients abandoning them for Advisors who do. Raymond Kerzérho, Director of Research at PWL Capital, discussed how his firm constructs globally diversified passive portfolios of ETFs to help take the emotions out of the investment process. Deborah Frame, VP and Portfolio Manager at Dundee Global Investment Managed described how her firm is taking an active approach to asset allocation through ETFs.

Panelists generally agreed that the proliferation of ETF offerings covering every corner of the equity, fixed income and alternative asset space represents a blessing for those equipped to assemble products into coherent solutions. In some ways, it's never been easy to build a diversified global portfolio. On the other hand, some advisors acknowledged that the 'paradox of choice' might lead to 'paralysis by analysis' as clients and advisors alike struggle to keep up with all the new offerings.

3. Relatively new robo-advisor and hybrid robo-human platforms are rapidly gaining traction in the U.S., and several smart Canadian offerings are popping up north of the border. The disciplined, diversified investment portfolios offered by these platforms, which automatically rebalance and alter portfolio composition in response to clients' life phases, are already causing clients to question the role of their traditional advisor. Someone mentioned the existence of ETFs that provide exposure to a globally diversified portfolio with zero management fee.

At the same time, it was widely recognized by panelists and thoughtful advisors in the audience that robo-solutions lack some important 'soft' qualities, which represent substantial benefits to clients. Of course, advisors can help clients develop comprehensive estate and financial plans, and perhaps better address client objectives that do not map directly to the 'mean-variance plane'. In addition, advisors can help keep clients focused on the long-term during periods when clients are tempted to leap to a 'faster horse' during bull markets, or abandon their plan altogether at the depths of bear markets.

Mark Yamada, President and Chief Executive Officer of PUR Investing felt strongly that advisors must adapt to survive. In particular, advisors should think hard about their value proposition in an environment where clients refuse to pay fees for strategic asset allocation, manager selection, or rebalancing. He suggested advisors must decide whether they can add value with more dynamic asset allocation approaches, or else differentiate with highly personalized financial and estate planning services.

4. There was a grudging agreement among all but the most die hard 'pacifists' that a potential low return future across most asset classes would require a more active approach to asset allocation in order to meet client needs. Robyn Graham from Hahn pointed to her firm's track record of navigating major global macroeconomic trends with diversified ETF portfolios to suit different client preferences. Deborah Frame presented a compelling case for quantitative approaches to asset allocation, which we obviously support. James Morton highlighted some unique 'quirks' about ETFs that can trip up inexperienced advisors, and reminded everyone of the large and growing reporting burden for foreign holdings.

For our part, I explained how our product lineup is a continuum extending from the truly passive global market cap weighted portfolio at one end, through active diversification strategies and Adaptive Asset Allocation approaches, to pure tactical solutions at the 'active' extreme. I also made the point that portfolios can benefit from non-correlated strategies, such as CTA funds, for so-called 'tail protection' when things get ugly.

5. Michael Jones, Chief Investment Officer for RiverFront Investment Group in Richmond Virgia closed the event with a compelling presentation about the growing importance of external ETF solutions for advisors who want to adapt to a rapidly changing wealth management landscape. The Registered Investment Advisor community in the U.S., analogous to Canadian independent Portfolio Managers, have embraced ETF mandates with a voracious appetite over the past five years. This segment has been one of the fastest growing channels in asset management, and several managed ETF mandates boast AUM in the tens of billions. As investors wake up to an increasingly complex, global risk environment with few easy solutions, we don't expect this trend to reverse any time soon.

At root, the event offered advisors a clear mandate: success in the future must be founded on a model that puts clients first. Advisors who can learn to use all the new tools at their disposal to offer differentiated value have the opportunity to take a much larger share of the pie. Advisors who cling to a an antiquated model will be pushed to the edge, and fade away. "Grow or die": hasn't that always been the way?