As the financial industry moves towards a fee-based advisor managed business model, ETFs have benefited from the increased transparency and fiduciary responsibility.
Dominic Maister, a managing director at BlackRock Inc., argued that pricing transparency was one of the “three structural trends” that has pushed more investors and financial advisors to embrace ETFs, reports Jeff Benjamin for InvestmentNews.
“It’s pricing transparency, but it’s also about being able to measure whether the product does what it says it will do,” Maister said.
Maister also contended that the transition away from the old commission-based brokerage accounts towards fee-based advisors has also contributed to the ongoing growth in ETFs. Since fee-based advisors also have their skin in the game to a certain degree, these financial advisors find it more worthwhile to look for investment instruments that will help lower overall costs. Consequently, many fee-base advisors have turned to dirt-cheap, index-based investments like ETFs that provide broad market exposure at a low cost.
ETFs Popularity Among Fee-Based Advisors
“We know that ETFs make up 1% or 2% of the book of business for a broker, but when they switch to fee-based, that goes up to 15%,” Maister said. “Part of it is the DOL rule, but it’s not just the DOL rule. Firms, in general, appreciate more predictable revenue.”
Lastly, Maister pointed to the “separation of alpha from beta” as the last driving factor behind ETFs’ growth, referring to the relatively inexpensive market beta exposure ETFs can provide through passive, low-cost indexing.