Fee-only and transactional advisors go head-to-head over whether the ETF is poised to take over from the tried-and-true mutual fund.
For the vast majority of Canadians, when it comes to investment funds and the fees tabbed onto them, there is a lack of understanding around costs even when there's a 1.5 per cent gap in fees.
While all investors have heard mutual funds largely mirror ETFs, many still fear those relatively new offerings to Canada. That’s mostly because of a lack of knowledge.
But a growing number of advisors are leading the charge to break through that ignorance and better connect clients with a low-MER alternative. Transactional advisors are among that group, trying to get ahead of the curve. Although fee guys are undoubtedly the chief proponents.
“We have chosen to focus on strictly using ETFs for client portfolios because they are a pre-diversified group of securities, so they are already risk-dampened. An individual can put them together and get an institutional-like portfolio at a much lower cost," says Mike Yamada, president and CEO of Pur Investing in Toronto.
John Tabet, senior financial advisor with Industrial Alliance Securities Inc. in Oakville, Ont. agrees and his firm uses ETFs for exactly that reason.
“Being fee-based advisors, ETFs fit into a fee-based strategy because they allow us to lower cost to the underlying client,” he tells WP. ETFs make up about 30-40 per cent of the firm’s client portfolios.
With CRM implementation chugging along, “it will be transformative for the industry,” he says.
Transparency is also another benefit of ETFs over mutual funds, argues Yamada. (continued)
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“That’s important in volatile markets because you want to know what you own so that you know where you are vulnerable. With mutual funds you don’t know what you own until it’s usually too late.”
He suggests that level of knowledge of a client’s exposure to Canadian bank stocks, for example, would be in short supply were a mortgage crisis to occur, causing the stock’s value to drop. “You would have to guess your exposure,” says Yamada.
That kind of analysis has traditionally rubbed “mutual fund” advisors the wrong way, but a surprising number tell WP that they see the market moving in the direction of ETFs and they are actively tweaking their own models to accommodate those clients looking for a fee system.
Those commission advisors are also conceding that the enhanced liquidity of ETFs is another feature attracting their customers.
“There is less liquidity in a mutual fund than an exchange-traded fund,” says Tabet. “ETFs have intra-day liquidity, which means I can buy and sell it during the day, whereas a mutual I can only buy and sell once a day, at closing.”
Still, they also point to enough potential disadvantages to ETFs — intraday pricing issues, unfavourable bid-ask spreads, the higher management costs for ETFs over regular stocks, etc. — as support for the idea that mutual funds will continue to offer a fair return for their clients even with or without the loss of embedded commissions and the typically higher MERs of mutual funds.
Yamada may not buy it.
He points to the early adopters of ETFs — CEOs of major companies who felt they were the cheapest, most cost-effective way of getting access to broad markets.
The same will happen with advisors and wealth management professionals, he predicts. Still all may not be rosy in the ETF future Tabet sees. It’s why wealth professionals have to work more diligently to make these funds easier to understand and have to do a better job of educating clients, he says.
Related Stories:
A falling loonie hasn’t lifted all Canadian ETFs
Cheap ETFs put pressure on Canada: Toronto advisor
ETF growth set to accelerate - study
While all investors have heard mutual funds largely mirror ETFs, many still fear those relatively new offerings to Canada. That’s mostly because of a lack of knowledge.
But a growing number of advisors are leading the charge to break through that ignorance and better connect clients with a low-MER alternative. Transactional advisors are among that group, trying to get ahead of the curve. Although fee guys are undoubtedly the chief proponents.
“We have chosen to focus on strictly using ETFs for client portfolios because they are a pre-diversified group of securities, so they are already risk-dampened. An individual can put them together and get an institutional-like portfolio at a much lower cost," says Mike Yamada, president and CEO of Pur Investing in Toronto.
John Tabet, senior financial advisor with Industrial Alliance Securities Inc. in Oakville, Ont. agrees and his firm uses ETFs for exactly that reason.
“Being fee-based advisors, ETFs fit into a fee-based strategy because they allow us to lower cost to the underlying client,” he tells WP. ETFs make up about 30-40 per cent of the firm’s client portfolios.
With CRM implementation chugging along, “it will be transformative for the industry,” he says.
Transparency is also another benefit of ETFs over mutual funds, argues Yamada. (continued)
#pb#
“That’s important in volatile markets because you want to know what you own so that you know where you are vulnerable. With mutual funds you don’t know what you own until it’s usually too late.”
He suggests that level of knowledge of a client’s exposure to Canadian bank stocks, for example, would be in short supply were a mortgage crisis to occur, causing the stock’s value to drop. “You would have to guess your exposure,” says Yamada.
That kind of analysis has traditionally rubbed “mutual fund” advisors the wrong way, but a surprising number tell WP that they see the market moving in the direction of ETFs and they are actively tweaking their own models to accommodate those clients looking for a fee system.
Those commission advisors are also conceding that the enhanced liquidity of ETFs is another feature attracting their customers.
“There is less liquidity in a mutual fund than an exchange-traded fund,” says Tabet. “ETFs have intra-day liquidity, which means I can buy and sell it during the day, whereas a mutual I can only buy and sell once a day, at closing.”
Still, they also point to enough potential disadvantages to ETFs — intraday pricing issues, unfavourable bid-ask spreads, the higher management costs for ETFs over regular stocks, etc. — as support for the idea that mutual funds will continue to offer a fair return for their clients even with or without the loss of embedded commissions and the typically higher MERs of mutual funds.
Yamada may not buy it.
He points to the early adopters of ETFs — CEOs of major companies who felt they were the cheapest, most cost-effective way of getting access to broad markets.
The same will happen with advisors and wealth management professionals, he predicts. Still all may not be rosy in the ETF future Tabet sees. It’s why wealth professionals have to work more diligently to make these funds easier to understand and have to do a better job of educating clients, he says.
Related Stories:
A falling loonie hasn’t lifted all Canadian ETFs
Cheap ETFs put pressure on Canada: Toronto advisor
ETF growth set to accelerate - study
