Over two thirds of advisers indicated that they have little or no understanding of the structure of synthetic ETFs and over half have little or no understanding of asset based ETFs.
With the FSA having already expressed concerns about the complexity of ETFs and there being a lack of understanding of how they work by both advisers and customers, there is a real danger of these funds being used when they should not be.
Advisers are clearly wary of this issue and this is underlined by the research which showed that over 70% of advisers do not have any clients holding ETFs, and of those who do, the overwhelming majority hold 5% or less of this type of asset in their portfolio. This illustrates that ETFs remain very much a niche passive investment solution that is suitable for a limited number of clients.
For those looking to use low cost passive investment solutions, tracker funds seem to be an increasingly popular alternative option. The survey showed that when utilising passive investments in client portfolios, advisers strongly favoured the use of trackers over the likes of ETFs and structured products.
Not only are tracker funds the preferred passive investment choice for advisers and clients, Skandia's analysis shows that tracker funds can also be more cost effective than ETFs. A passive portfolio could be built for as little as 43bps (based on a £100,000 investment) on the Skandia platform. This compares to a similar portfolio built using ETFs via a wrap which would typically cost around 75bps.
However, whilst there has been an apparent increase in the popularity of passive investments, demand and use of passives still appears to be relatively low. The Adviser Confidence Barometer showed that the majority (54%) of advisers have 10% or less of their clients' assets in passive investments. Furthermore, the use of ETFs and other passive investments such as investment trusts, direct equities and structured product looks set to remain low post RDR with the majority of advisers foreseeing no change in their use of these investment solutions.
Graham Bentley, head of proposition, comments:
"The structure of ETFs can be inherently complicated. It is therefore understandable that such a significant segment of advisers have little or no understanding of these funds and for the FSA to be concerned about their use in the retail space. With a general lack of understanding and increased scrutiny over the use of ETFs it is likely that demand for ETFs will remain limited even after the RDR and our research supports this.
"One of the benefits that have often been touted about ETFs is that they are a low cost passive solution. However, there are other ways for investors to access low cost passive investment solutions; a very effective way to do this is via tracker funds. These funds can not only be cheaper than ETFs but also are much simpler for both advisers and investors to understand making them a potentially much more appropriate passive solution for the retail space."
