A proliferation of exchange-traded fund (ETF) products may be leading some advisers to take over full responsibility for asset allocation within client portfolios, prompting them to take on a macro-economic role they may not be suited to and reducing their focus on other client services.
During the global financial crisis traditional approaches to asset allocation weren’t enough to protect clients, creating a desire for more tactical use of funds, according to Morningstar’s global head of funds research Don Phillips.
“Basically the adviser is wrangling away the asset allocation decision from professional investors and taking it on themselves, and in many cases using index funds or ETFs to do this,” Phillips said.
Greater variety in ETF products means an adviser can construct core/satellite portfolios using ETFs at both ends, with a core of index products and more exotic ETFs at the fringes, Phillips said.
“Most individuals didn’t hire their planner to be a macro-economic portfolio manager and you don’t really know how skilled these individuals are,” Phillips said.
“There’s a segment of advisers who have probably gone overboard with the thrill of this new tool kit. I can see some people running amok with this and you can do as much harm as good,” he said.
This trend is more advanced in the US than Australia, where there is a much greater number of ETFs available, he added.
Centric Wealth portfolio construction committee chairman Ashley Owen said the first priority of an adviser should be understanding the client.
Owen said that in the past, advisers had been taking on too much asset allocation, but it was hard enough to keep track of all the superannuation and tax loopholes and do estate planning (and so on) without trying to be expert stock pickers as well.
Centric advisers have access to an in-house investment and operations team, freeing up the adviser to focus on the client, he said.
NAB Private Wealth adviser and Money Management’s 2010 financial planner of the year Catherine Robson said she had access to a variety of ETFs, which provided broad diversification at low cost.
However, an adviser’s main value is as a behavioural coach for clients and helping them make rational rather than emotional decisions, she said.
Spending more time with the client is what they really value, but that means not doing your own research on a universe of products, instead leveraging the licensee’s research and resources, she said.
BetaShares head of product strategy Drew Corbett said that we will start to see more of an evolution of advisers looking more at the macro-economic side and strategic asset allocation – but the simplicity and transparency of ETFs could actually make an adviser’s job easier.
An adviser who previously may have had to choose between 25 or more managers on an Approved Product List can now just allocate sector weights using ETFs, he said.
“Advisers can add value by lowering the overall cost of investment by using these types of products, by maintaining diversity and keeping the investment decision at a higher level,” Corbett said.
