They offer access to a wide range of markets, at a low cost and in an efficient manner.
But as the RDR has taken effect, so ETFs have become more important. They are an embodiment of the clarity of charging connected to the RDR and are becoming a much bigger factor in advisers’ decisionmaking when it comes to advice.
The traditional index-tracking industry is responding to the assault on its customer base by cutting some of its own costs. New products coming on to the market are cheaper than their existing counterparts, and current products have had their costs slashed.
In this age of diminished bank returns, ETFs can also be used for income, either through equity income or bonds.
But for an adviser to decide whether they should put their clients into an ETF a full analysis of the costs is important. For example, investing in the short term can, according to some experts, make the investments more expensive. This factor is compounded by the current low-yield environment, so that advisers, when they go through a broker, will have to decide if it is worth the cost involved.
It is also important to make sure one has a clear understanding of what the client’s requirements are and how the ETF’s risk profile will change over time.
One of the challenges that advisers face is the question of dealing in the secondary market, especially if the market makers cease to exist. Guidelines from European Securities & Markets Authority have attempted to address this.
ETFs are one of the newer products on the retail investment landscape; under the new regulatory regime they are certainly deserving of attention.
Melanie Tringham is features editor of Financial Adviser