Should every financial services firm have a digital platform?
If overall trends in the market are to be believed, the move shouldn't be up for debate. Still, most traditional firms have been slow to announce their online intentions.
Therein lies the opportunity for ETF providers, says Dodd Kittsley, head of ETF strategy and national accounts at Deutsche Asset & Wealth Management. (Deutsche Bank has made a number of investments in technology, yet remains unclear on whether its client base in the U.S. would prefer robos over actual advisors.)
Case in point: The $152 million deal done by BlackRock for robo startup FutureAdvisor. The digital platform opens up a new channel for product distribution and access to a new investor base, Kittsley says.
It's also a point in time to reflect on how innovation in the digital space will affect ETFs, he tells Re: Invent|Wealth, as that will shape future offerings from providers.
How do robos affect ETFs?
It really opens an avenue to a different investor base. I think certainly that’s going to be a continued catalyst for growth in the industry. For these robo advisors, certainly much of their objective is to deliver strategic allocation models for long-term investors; and ETFs, when you think about it, are the purest way to execute on an asset allocation strategy.
They are tax efficient and low cost, things that are very important for long-term investors. We think robo advisors being in the industry is a very favorable trend. It opens up the market to a much broader investor base. When you think about the ETF industry 10 or 15 years ago, the focus was primarily on the wirehouses, and certainly on the financial advisors. It took a while for asset managers to think about service in the institutional community.
Now, institutions have been using ETFs for a long time, too, but they’ve been specific institutions. The self-directed market, which robo advisors really do hit, in particular the millennials who are self-directed investors, is incredibly exciting to me. More and more folks in the industry are now focused on the self-directed investors because ETFs have become the mainstream and it’s a great source.
It’s not uncommon for us in conversations with financial advisors, particularly those who have not adopted ETFs yet, for them to come to us and say, 'I’ve heard from my clients that there is this ETF,' so it’s opened up all different gates in terms of opportunities for us.
How does that then affect the production and distribution?
Robo advisors are certainly aggregators, or at least big users of ETFs. We view them as folks who are managing model portfolios, part of the ETF strategist community. There are certainly points of leverage. For anyone who is building an asset allocation model and distributing to multiple entities, ETFs certainly lend themselves because of their characteristics. It certainly is an opportunity to focus on, so they know what products are out there and what the differences in tradeoffs are.
Were you at all surprised when BlackRock declared that they were going to buy a robo advisor?
No, I think it’s another form of distribution. In whatever form it takes, it’s a way of delivering advice and value to clients. For those of us in the ETF industry that think we have distinct advantages over other structures, it makes all the sense in the world.
Will that acquisition prompt other asset managers to follow suit?
It’s a good question. I don’t know. It’s certainly a strategic decision and I think there are many ways an asset manager can access the robo advisor market. Some can be through purchase and others can be through strong partnerships and servicing of those partnerships, so it’s a strategic business decision and it’s going to be interesting to watch what others have done. But, I think at the very least it’s a testament that there is an enormous opportunity in that line of distribution.
Do you think Jeffrey Gundlach’s actively managed ETF opened the market to look at ETFs as something other than a wrapper with the lowest costs?
Active, in terms of full-blown active manager discretion, has been around for several years with a lot of several big name managers there. I think the fact that those managers are choosing ETFs as a way to distribute their active strategies is a testament to the value that the products can bring. I’d expect to see more of that through time.
Certainly fees are only one component of the advantages that ETFs offer. It is an example in many instances that ETFs don’t have to have uber low fees; fees should be driven by the value that you’re delivering. There’s a lot of value that one is paying for with an active management that’s different from an indexed type of strategy.
I think there is something similar in the strategic beta space. There’s a lot going on there. Strategic beta in international equities requires higher fees and I’m not surprised there. You have to pay for the management team, research and all the work that goes in. It’s enormous work managing an index-based product. It’s just a different order of magnitude when you’re managing active products as well.
What other innovation in development do you see happening in the ETF market in the next six months?
We still think a lot of the innovation is still in the beginning phases, so I would expect to see different angles, different exposures in the market continually being developed by index providers and packaged by asset managers in an ETF format in a variety of different areas — certainly in fixed income and solutions in fixed income, particularly around certain interest rate increases we expect to occur and I think there is a lot more on the international equity side, too.
It’s amazing that five years ago nobody thought about currencies — currency hedging was just an elegant, beautiful solution — so it has gotten a lot of people very much thinking about what is going to be out there.
Certainly everybody is looking at active from a non-transparent standpoint. That’s going to be an interesting thing to watch in the marketplace. Many have been working on the 401(k) market and finding solutions there to use that as an avenue to distribute out. Certainly, the fintech space — we’ve talked about robo advisors for a while and that is just a component of that. Just linking that in with some of these fintech companies would be very, very interesting — something to watch.
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