Improve your value proposition to clients with ETFs

“The type of advisor that uses exchange traded funds brings a little bit more to the table in their value proposition,” he said.

Cummings pointed out that it’s becoming harder to attract clients on basis of offering superior returns. “We all have access to substantially the same product,” he said.

But by using ETFs, he explained, advisors can help clients achieve lower fees, better risk management and more control over the taxes they pay.

“Exchange traded funds are very, very different [than mutual funds] in that you have a lot more control over when the client pays their taxes,” he said. “Exchange traded funds – individual equities – are a great way to deter as much of that tax liability into the future as possible.”

Cummings added that clients have become increasingly “fee-aware,” and they’ll appreciate your efforts to save them fees whenever possible.

“People want to save money, definitely,” he said. “But they also want, first and foremost, value for money.”

Many advisors are neglecting ETFs

Cummings pointed to survey results showing that roughly 80% of investors under the age of 50 are familiar with ETFs, and like the idea of investing in them. However, only a quarter of those investors said their advisor had recommended ETFs to them.

If advisors don’t address these products, they could risk losing clients to other advisors who are.

“If these people know about ETFs and like ETFs, and they’re not having a discussion on ETFs with their investment professional, where is it that they’re ultimately going to go to have that discussion?” Cummings said. “You need to be equipped to have the discussion.”

Even if you aren’t keen on utilizing ETFs, Cummings said it’s important to talk to clients about why they aren’t the right fit.

He recommends using ETFs along with actively managed investments and other products within a portfolio. For instance, he said a client could use ETFs for asset classes that are efficient, such as real return bonds, and using actively managed investments for classes that are less efficient, such as emerging markets.

“We’re not here necessarily to replace the other ways you do business, but rather to add another tool to the toolbox, so that as you build robust portfolios for clients, you make a decision on is an ETF the right fit for the job,” he said.

Cummings said some advisors are wary of embracing ETFs because they don’t want to “disintermediate” themselves. They worry that clients will see how easy it is to build an ETF-based portfolio themselves and will switch to a discount brokerage.

But Cummings argued that if clients preferred to manage their investments independently, they would already be doing so with mutual funds and individual stocks.

“They could do that now,” he said, “yet they still see value in using an investment advisor.”

IE