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Investment strategists deliver institutional quality ETF solutions to retail audience


A rigorous focus on increasing client satisfaction – and relatively greater use of exchange traded funds (ETFs) in asset strategies – are emerging as key "drivers of success" for a new breed of advisors and asset managers who provide special expertise and deep knowledge of ETF portfolio construction and trading to advisors seeking outsourced model portfolios.

Those are among the key findings of new research released today by iShares, the global leader in ETFs, focused on the emerging class of "ETF Investment Strategists" (EIS), a term iShares uses to refer to registered investment advisors (RIAs) or asset managers utilising ETFs at the core of an outsourced investment solutions business. These advisors and managers utilise ETFs in their practice at virtually every stage in the investment process, from building complete asset allocation models to executing tactical strategies.

"More and more, we are seeing advisors striking partnerships with ETF Investment Strategists and, as a key result, successfully offering to their clients institutional quality portfolios and product innovation that once were too expensive and impractical for retail investors to own," says Sue Thompson (pictured), Head of iShares Registered Investment Advisor/Asset Management Group at BlackRock.

"The movement toward specialised ETF investment management represents a true sea change for the ETF market, as advisors increasingly recognise that ETF Investment Strategists can help decrease time spent on portfolio issues, create more time for building client relationships, and yield distinctive advisory value via their delivery of model ETF portfolios," she says.

iShares has been providing focused support to this specialised manager class, via its iShares Connect Program, since 2008, when it published its first "Guide to ETF Investment Managers." At that point, the Guide listed 25 managers and USD5.8 billion in total assets under management (AUM). Today, iShares is tracking more than 200 ETF strategies from more than 100 managers representing USD46 billion in assets, an almost 800 per cent increase in market size.

As the ETF Investment Strategist trend gains momentum, iShares projects that the sector could comprise USD120 billion in ETF assets by 2015.

"Given the growth trend, we decided that it made sense to generate fresh insights into the dynamics of this business, where firms are finding success, and the kinds of support needed by advisors and managers who are contemplating entry into this new advisory niche," said Katharine Earhart, Head of iShares Connect Program at BlackRock.

Conducted from March 27 to April 20, the iShares research initiative involved quantitative and qualitative interviews with 130 randomly selected firms. In order to participate, firms needed to offer model portfolio publishing and/or portfolio asset management services to financial advisors and were required to offer their strategies in managed accounts or defined contribution products. To ensure a comprehensive market picture, individual firms were required to deploy ETFs only to a minimal extent, i.e., more than 5 per cent of total portfolio assets in only one of their strategies. Among the firms interviewed, AUM ranged from less than USD50 million to greater than USD5 billion.

According to the research, nearly 80 per cent of successful ETF Investment Strategists viewed increasing client satisfaction as a fundamental aspect of success. One-third of respondents exceeding expectations for their business have a formal written target for increasing client satisfaction — nearly twice as many as less successful managers.

"Assets under management, revenue growth and portfolio growth are key, but our research suggests that firms who focus only on these metrics are unlikely to exceed their expectations for their outsourcing business," says Earhart.

"A consistent track record and fund performance are critical drivers of client satisfaction, but we also encourage managers to cultivate other important features for their business such as compelling product attributes, responsiveness among their wholesalers, and superior education and commentary," she said. "Integrity in all aspects of the client relationship is, naturally, an indispensable quality as well."

Nearly seven of 10 – 68 per cent – of the strategists surveyed use ETFs in all of their outsourced portfolio strategies. Three quarters of the managers who viewed their businesses as successful held at least 50 per cent of their total assets in ETFs; those with 80 per cent or more of total assets in ETF outsourced investment management were twice as likely to exceed their expectations for their business.

"It’s clear that, within the universe of managers who are focusing on outsourcing as a business opportunity, use of ETFs specifically as a portfolio tool can deliver a clear edge," Earhart said. "These managers have initially chosen ETFs for their cost efficiencies and ease of access into multiple asset classes. Over time, they are finding that ETFs can offer a dramatic differentiator compared with managers that remain highly dependent on other, less flexible approaches."

The research suggests that some strategists are struggling with identifying the appropriate mix of asset strategies. Firms can achieve asset growth through the proliferation of new products, but it is not a success driver identified by the iShares research.

The survey indicates that the most successful firms have from four to six strategies available through two to three product structures, mostly separately managed accounts and unified managed accounts.
"ETF Investment Strategists should resist the urge to develop new products simply in order to diversify the strategies they offer," Earhart said. "More products don’t necessarily result in more assets or greater success. Instead, innovation should deliver a concise, coherent suite of strategies in different structures or across distribution channels."

Remaining focused and committed to a strategic direction for the business — with a strong dedication to sales and marketing — are also key attributes of a successful EIS.

"There is strong evidence that many ETF Investment Strategists are just not dedicating enough time to developing a long-term strategic focus," Earhart said. "In fact, 25 per cent of firms have no formal written targets and one-third of respondents do not know their operating margins. At a minimum, firms should have put in place a strategic plan for product development, distribution and marketing," she says.

Successful firms leveraged the power of a direct sales force, with 57 per cent of firms that exceeded expectations using an external wholesaler sales force.

Nearly nine of 10 – 86 per cent – of all survey respondents said that marketing and distribution were a significant challenge, in particular, how to establish their message with clients and influence them to take action.

"Above all, a clear and consistent message is paramount," Earhart says. "Successful firms have not only communicated their investment philosophies — a critical differentiator for the EIS — but also emphasized valuable attributes such as flexibility to react to the markets, client service, proprietary research and, not least, use of ETFs."

"Market opportunities are now developing that could offer particular advantage to strategists committed to using ETFs in distinctive ways," Earhart says.

According to research by McKinsey & Company, over the next five years, the 401(k) market is expected to cumulatively grow by 35%, reaching close to USD5.5 trillion in AUM. Indexed based products are expected to account for up to one-fourth of all 401(k) assets by 2015, up from only nine per cent in 2006.

As baby boomers enter retirement, there is growing need for investment products – such as variable annuities – that provide guaranteed lifetime income, growth potential, flexibility and liquidity. "We see the variable annuity and insurance trust market as a largely untapped market for ETF Investment Strategists," Earhart said. "The market could use an injection of fresh and innovative offerings, such as ETF allocation models and flat-fee pricing."

Finally, Earhart notes, few ETF Investment Strategists have expanded into international markets, given local market complexities and barriers to entry. "ETF Investment Strategists can’t ignore the huge opportunity to penetrate market niches internationally with innovative products," she says.

iShares has been long committed to partnering with financial advisors to help them meet their clients’ goals and find innovative ways to grow their businesses. In addition to offering "The Guide to ETF Investment Strategists," iShares has since 2010 managed a program, the iShares Connect Program, which seeks to connect advisors looking to outsource portfolio management to ETF Investment Strategists.

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