Etf Analysis: Reforms Make A World Of Difference
ETF take-up trend is following the regulatory script. Australia is rapidly following the United Kingdom experience with exchange traded funds (ETFs). UK Financial Services Authority (FSA) plans to overhaul regulations governing financial advice will see independent advisers sharply increase the use of ETFs in the UK, predicts BlackRock's global ETF research and implementation strategy group. ETFs are a neat fit with the FSA's Retail Distribution Review proposals.
Similar trends are emerging in Australia. The Federal Government's Future of Financial Advice Reforms, the Henry Tax Review, and Cooper Review into superannuation are providing significant regulatory impetus for ETFs. Wealth management consultant Tria Investment Partners believes new regulations will take ETFs into the Australian financial products mainstream. " (ETFs) are playing into a particularly positive environment, which just seems to get better with every regulatory change."
Tria says: "Consider our prospective world post-Ripoll, Cooper and Henry a world of unbundled product commission, under pressure to lower costs, and with less concessionally taxed super. This world calls for stripped down, lower-cost products which are also tax-efficient. Could the script have been written any better for ETFs?"
Tria says ETFs are "getting traction, especially in prized segments, such as self managed super funds (SMSFs), funds sizes are expanding, and trading volumes are rising".
ETF outlook improving
Certainly, the various wealth-management reviews and reforms improve the outlook for an already fast-growing ETF market. The combined capitalisation of 32 ASX-listed ETFs was $3.2 billion at June 2010, ASX data shows up 76 per cent over the year. Perspective is needed: growth is off a low base and the overall capitalisation of ETFs is small in a market worth $1.65 trillion.
Still, Tria suggests the local ETF market could grow to as much as $25 billion over this decade if ASX-listed ETFs reach half the penetration of ETFs in the US about 5 per cent of total market capitalisation. Such growth will be achieved if many more Australian financial advisers embrace ETFs as an essential portfolio tool, and as ETFs become a key product for SMSFs.
Early signs are promising. Tria says up to 40 per cent of unitholders in some ETFs are SMSFs. "... While the wealth industry has been searching for the Holy Grail product that will lead them to the SMSF market, the SMSFs have started on their own migration towards ETFs."
ETFs help advisers
Australian reforms to introduce a statutory fiduciary responsibility for financial planners to act in the best interests of the client, and the new adviser fees regime, bode well for ETF uptake. Under new rules that will take effect in 2012, advisers must agree on fees directly with clients, disclose a clear charging structure, and send an annual renewal notice to their client when providing an ongoing service, giving an opportunity to opt-in to continue receiving it.
More advisers are using ETFs as low-cost tool to rebalance client portfolios quarterly. Advisers find ETFs are simpler for their firms to administer, reduce client portfolio costs, and do not have negative tax outcomes associated with some active managed funds. Most of all, ETFs gives advisers more control and time to focus on serving clients and thus meeting higher regulatory requirements.
The effects of reform on the ETF market in the UK are already emerging. The FSA cited ETFs as one of the packaged products that advisers who operate as independents after 2012 must understand.
BlackRock global head of ETF Research and implementation strategy, Deborah Fuhr, told UK wealth management industry publication IFA Online: We have seen an increasing number of requests on ETFs, which are listed and registered for sale in the UK.
Similar trends are emerging in Australia. The Federal Government's Future of Financial Advice Reforms, the Henry Tax Review, and Cooper Review into superannuation are providing significant regulatory impetus for ETFs. Wealth management consultant Tria Investment Partners believes new regulations will take ETFs into the Australian financial products mainstream. " (ETFs) are playing into a particularly positive environment, which just seems to get better with every regulatory change."
Tria says: "Consider our prospective world post-Ripoll, Cooper and Henry a world of unbundled product commission, under pressure to lower costs, and with less concessionally taxed super. This world calls for stripped down, lower-cost products which are also tax-efficient. Could the script have been written any better for ETFs?"
Tria says ETFs are "getting traction, especially in prized segments, such as self managed super funds (SMSFs), funds sizes are expanding, and trading volumes are rising".
ETF outlook improving
Certainly, the various wealth-management reviews and reforms improve the outlook for an already fast-growing ETF market. The combined capitalisation of 32 ASX-listed ETFs was $3.2 billion at June 2010, ASX data shows up 76 per cent over the year. Perspective is needed: growth is off a low base and the overall capitalisation of ETFs is small in a market worth $1.65 trillion.
Still, Tria suggests the local ETF market could grow to as much as $25 billion over this decade if ASX-listed ETFs reach half the penetration of ETFs in the US about 5 per cent of total market capitalisation. Such growth will be achieved if many more Australian financial advisers embrace ETFs as an essential portfolio tool, and as ETFs become a key product for SMSFs.
Early signs are promising. Tria says up to 40 per cent of unitholders in some ETFs are SMSFs. "... While the wealth industry has been searching for the Holy Grail product that will lead them to the SMSF market, the SMSFs have started on their own migration towards ETFs."
ETFs help advisers
Australian reforms to introduce a statutory fiduciary responsibility for financial planners to act in the best interests of the client, and the new adviser fees regime, bode well for ETF uptake. Under new rules that will take effect in 2012, advisers must agree on fees directly with clients, disclose a clear charging structure, and send an annual renewal notice to their client when providing an ongoing service, giving an opportunity to opt-in to continue receiving it.
More advisers are using ETFs as low-cost tool to rebalance client portfolios quarterly. Advisers find ETFs are simpler for their firms to administer, reduce client portfolio costs, and do not have negative tax outcomes associated with some active managed funds. Most of all, ETFs gives advisers more control and time to focus on serving clients and thus meeting higher regulatory requirements.
The effects of reform on the ETF market in the UK are already emerging. The FSA cited ETFs as one of the packaged products that advisers who operate as independents after 2012 must understand.
BlackRock global head of ETF Research and implementation strategy, Deborah Fuhr, told UK wealth management industry publication IFA Online: We have seen an increasing number of requests on ETFs, which are listed and registered for sale in the UK.
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