Knowledge of the fundamentals of exchange-traded funds (ETFs) remains low, not only among Canadian investors, but among some financial advisors as well – and this presents a barrier to greater adoption of ETFs, according to the results of a recent survey.

In the survey of a sample of Investment Executive readers, conducted by Credo Consulting Inc. and TC Media’s Investment Group, which includes Investment Executive, nearly half of the 227 respondents said they do not sell ETFs. Of those advisors, 18% said the main reason that they have not adopted ETFs is that they don’t understand ETFs well enough to recommend them to their clients.

It takes time and effort to thoroughly understand any new product, and considering advisors’ busy schedules, it’s not surprising that there’s a gap in ETF knowledge, says Hugh Murphy, managing director of Credo Consulting.

“Advisors become comfortable with the products that they are already familiar with,” says Murphy. “To get advisors to dig into a fundamentally different and new instrument is an extremely challenging thing.”

For the average Canadian investor, the survey results suggest — not surprisingly — that ETF knowledge is even weaker. Nearly three-quarters of those advisors who sell ETFs said they believe that retail investors generally do not understand the fundamentals of ETFs.

This gap in knowledge, however, does not reflect a lack of resources, industry players say. The ETF industry has invested heavily in developing educational materials for both investors and advisors, according to Pat Dunwoody, executive director of the Canadian ETF Association (CETFA).

“Certainly, if the information is required by the advisor, it’s available,” Dunwoody says.

In addition to resources from the CETFA, individual ETF providers regularly host informational seminars and provide one-on-one support for advisors.

“We spend a lot of time educating advisors on how to use ETFs,” says Kevin Gopaul, chief investment officer at BMO Global Asset Management Inc. “It’s important for the advisors themselves to be well versed.”

Some advisors appear to be tapping into these resources. Respondents said the primary ways they learn about ETFs is by reading online information, reading print publications and meeting with product manufacturer representatives. A smaller proportion of respondents said they attend formal educational sessions held by their dealer, use resources provided by the ETF industry association, or have informal discussions with colleagues.

Advisors feel they play an important role in educating their clients on how ETFs work, and thanks to the steps they’ve taken to do so, most advisors feel that their own clients have a better grasp of ETFs compared to the average investor. When asked about their own clients’ understanding of ETFs, 73% said their clients understand the fundamentals.

Advisors use various resources to educate their clients on ETFs. The most frequently cited methods include simple face-to-face meetings and contrasting the differences between active and passive money management. This is typically done in conjunction with printed material supplied by ETF manufacturers.

In addition, 17% of advisors said they encourage clients to “go it alone” by directing them to websites to educate themselves on ETFs. Although that’s somewhat surprising, Murphy suspects that given advisors’ hectic schedules, they may consider it most effective for clients to do some of their own research — especially considering the vast scope of educational materials available.

“The ETF companies do an impressive job of providing information,” says Murphy.

Some advisors may also be reluctant to get into an in-depth conversation with clients, since certain aspects of ETFs can be complicated, Gopaul says. Rather than delving into the intricacies of the products, he says the important thing for advisors to convey is the role ETFs can play in a client’s portfolio.

“The key thing is to focus on the value proposition,” Gopaul says.

Part two of a web-exclusive companion to Investment Executive‘s ETF Guide for Financial Advisors, 2015.