Fund platform research firm Platforum has published its latest UK fund distribution report on passives, ETFs and smart beta.
Miranda Seath, Senior Researcher, Platforum.
The research reveals that while tracker fund assets have doubled since the implementation of the RDR, supported by widespread take-up by financial advisers, ETF adoption by financial advisers has been significantly less pronounced.
For the first time, the report identifies the extent to which tracker funds and ETFs are held on adviser and direct platforms.
Passives on platform
18.1% of adviser platform assets are invested in passives compared with 5.5% on direct platforms. ETFs make up a significantly smaller share on adviser platforms than they do on direct platforms. This is partially because of the stockbroking heritage of many direct platforms.
The research outlines a number of barriers to ETF adoption on adviser platforms including:
– Transaction costs: The cost of running ETF portfolios is higher than tracker fund portfolios on adviser platforms. This was the case on 10 of the 18 platforms included in the research. (This was not the case for direct platforms where charging was generally comparable for ETFs and tracker fund and on seven direct platforms it was cheaper to use ETFs.)
– Fractional share trading: ETFs are often traded as complete shares. This creates problems for small investments, regular investing and model portfolio rebalancing and is a barrier to ETF take-up.
– Intra-day trading: ETFs can be traded intra-day, which is not possible for tracker funds. However, seven of the 18 adviser platforms we spoke to for this report don’t offer intra-day trading.
The firm believes that platforms are too passive in the provision of ETFs.
Jeremy Fawcett, Head of Direct at Platforum, commented: “There has been a shift to passives with tracker fund AUM accelerating post RDR, doubling to 40% of net fund sales today. However, ETF use by financial advisers has bumped along around 1% of sales.
“Our latest report, UK Fund Distribution: Passives, ETFs and Smart Beta, finds 14.5% of platform assets are in passives but while this is split equally between tracker funds and ETFs on direct platforms, there is only 1.3% in ETFs on adviser platforms.”
What is holding ETFs back?
Miranda Seath, Senior Researcher at Platforum, added: “Advisers are looking to reduce the underlying cost of the funds that they use and, unsurprisingly, that is their top reason for using passives. Most advisers have recommended passives and when they have bought ETFs on behalf of clients it has overwhelming been via a platform.
“When we compare pricing for running a typical ETF model portfolio versus a tracker fund portfolio on adviser platforms we find the ETF route is more expensive for the majority and substantially more expensive for 40%. Not the case for direct platforms which are generally on a par or less expensive for typical ETF portfolios.”
The report also noted that issues with fractional share trading was a hindrance to ETF take-up.
According to Seath, “Fractional share trading is important to enabling small investments and has a bearing on regular investing plans and managing model portfolios. We expect to see fractional trading solutions launched in the near future.”