ETFs pose problems for planners and fund dealers

Young says that there is essentially an unlevel playing field when it comes to ETFs. ETFs are treated just like individual stocks. They are sold on stock exchanges, permitting not only active trading, but also margin buying and short selling. This sort of trading is simply not possible with mutual funds. Since they are treated as stocks, advisors also require a securities licence to sell them, although the products are for all intents and purposes mutual funds.

Young says that many advisors would happily put their clients into ETFs, recognizing the benefits for investors, but they simply can’t sell them. This should change he says.

There should be some legislative accommodation or registration exemption to allow fund dealers to also sell ETFs, Young argues, suggesting that they be restricted to long trading only, if necessary. Otherwise, advisors face a couple of stark choices: either upgrade to a securities licence, or prepare to get out of the business.

Young argues that it really isn’t necessary for tens of thousands of reps to get securities licences just to sell ETFs, which are essentially cheap mutual funds. “The current rules are a cruel joke for fund dealers,” says Young. The only other options at this point are for advisors to send their clients to a discount broker. For example, they could use MRS Securities Services, which allows fund dealers to direct clients to a broker that promises not to scoop their business and split commissions. The other option is that they deny their clients ETFs altogether.