Yie-Hsin Hung: Welcome, Rob. Thank you so much for joining us today.
Robert Pettman: Thank you, glad to be here.
Yie-Hsin Hung: As you know, we're here to talk about ETFs, so let's jump right in. ETFs were first designed to address market stability following the October 1987 stock market crash. And they were tools primarily for institutional investors. But along the way, over the last 30 years, that's changed, and today, ETFs are portfolio building blocks for all types of investors. And clearly, advisors have been leveraging ETFs in this way also. So as a thought leader in our industry, I thought it would be interesting to get your perspective on why advisors and LPL advisors have embraced ETFs for their clients.
Robert Pettman: Certainly we're seeing the uptick in levels of adoption. If I were to break it down into a couple of different themes, this is trend-wise over time, that has really helped to accelerate that pace of adoption. So when I think about what those are, I think about the brokerage to advisory macro shift that's occurring in the wealth management business. I think about how technology is evolving and influencing the way in which financial advisors are managing portfolios. I think about the product development that's happening in the space offering new and unique solutions and solving problems that maybe might be more challenging in these purists-type fashion. So if I was to unpack some of those I think about the brokerage to advisory conversion. If I'm moving from brokerage, mutual funds have had a really long time being successful there and they have a lot of great qualities and properties and rights of accumulation. You get to enjoy free trading across a menu of funds within a family. It is typically done very well in the advisor space. It's also a lighter touch service model. When you contrast that to advisory where a lot of the business is heading, this is a much heavier touch service model. It's a multiple product type, multiple manager type environment that requires different types of solutions in there that can do great things for investors. So that's a natural catalyst to that evolution. And then similarly, when you look at technology and how it's helped to influence how advisors are managing portfolios, just what's happened with trading technology and running a models-based practice, even the platforms themselves, they all help to promote the overall level of adoption. And certainly last but not least, that packaging element of the product solutions. I might have a certain investment belief and I can carve that out as a portion of my portfolio. So I think those are really the thematic buckets that I think about that's really helping to drive the level of adoption across advisors in the wealth management space.
Yie-Hsin Hung: That makes a lot of sense, and you've really given us a very crisp answer on how the use of ETFs has evolved over time.
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text: The adoption of ETFs by advisors
Yie-Hsin Hung: If we can maybe double-click on this idea of adoption, can you give us a sense of how widely ETFs have been adopted by advisors?
Robert Pettman: When I get those questions, I think about the industry and the statistics and I often go to Cerulli and just look at what they have done with a lot of market research as it relates to those trends. And what they have is really fascinating because if you think about it, 10 years ago, advisors on average were allocating to ETFs at about 9% of the portfolio. And if you fast forward today, that's actually 25% now. That's more than doubled over the past 10 years, so certainly a significant trend there. And we see similar properties, obviously, occurring within our ecosystem. But I just think the macro industry stats are always fascinating to see as well.
Yie-Hsin Hung: So that's pretty impressive adoption, I'd say. Perhaps start from where we are today, and what do you expect going forward?
Robert Pettman: Answering that question, it's always a tough one, but then if you start to look at the demographics of what's actually occurring, I think the most interesting thing for me is that when you look at financial advisors between the ages of 35 and 44, they're allocating on average about 31 per cent to ETFs. And if you were to look at financial advisors from ages 55 to 64, they're on average about 23 per cent per Cerulli. So if you think about the newer, younger generation of financial advisors moving out into the future with a higher level of adoption that only bodes well for the adoption of this product category overall as the business continues to evolve and change.
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text: How ETFs have transformed wealth management
Yie-Hsin Hung: So let's take a step back and just look at the wealth management industry as a whole. And what is your view on how ETFs have just transformed that industry?
Robert Pettman: They've done a whole host of different things, and particularly within the advisory space. And the utility that they offer financial advisors to really do wonderful things for clients in the process of portfolio construction and money management. When you break down what some of the most popular reasons why some choose to use ETFs, it gets down to having a core position within the portfolio that's tax efficient and cost efficient. It's about being able to express a certain sector belief that I referenced earlier and really being able to get very specific and connected to that is also the ability to just have another tactical position within the portfolio with all those similar properties that I mentioned, the cost efficiency and tax effectiveness as well. You put all those together, combined with some of those other macro features that I mentioned before, the service level delivery model, the technology that supports it. That's really the wonderful thing that these types of products have done to really help advisors do even more for investors than they were doing before.
Yie-Hsin Hung: That's great to hear.
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text: ETFs and the advisory practice
Yie-Hsin Hung: When you think about what advisors do on a day-to-day basis, it seems like ETFs have impacted that as well. So maybe can you speak to that too?
Robert Pettman: You look at the types of problems that you want to solve, and we in the wealth management industry, we focus on problems and how we go about solving those problems to help investors reach their goals and dreams. And in some cases, this is a complex business. Sometimes certain strategies are complex and challenging to be able to implement in the natural way and having a vehicle that in essence allows something that's packaged and easily accessible in a cost effective way, whereas it might have been incredibly operationally cumbersome, it might have been incredibly expensive to implement, and also harder to upkeep on a regular basis, going from there to here with an ETF wrapper certainly helps that influence, that day-to-day, because you're getting the operational efficiency, you’re getting the types of outcomes that you're looking for in a convenient way that you're able to stay on top of, and while you're also managing your client relationships and making sure that they're hitting their goals and dreams.
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text: How ETFs have transformed wealth management
Yie-Hsin Hung: I have one final question for you. And that is, what do you think is the next big thing in ETFs?
Robert Pettman: That's a challenging question for sure. I think if I were to give you some things that might change, I think, or what might be on the horizon. I think about the number of providers for ETFs. I think it's gone just at a rapid clip. I don't have all the stats in front of me, but it was around 11 at some point, and now we're over 200. So you've got more and more new entrants entering the marketplace. And as I think you've got the more entrants, you've got a diversified slate of solutions available. You have rising popularity. I think, all of those are going to correlate to even some home office research organisations leaning in more into the implementation of some of the models that they run within their own sort of essentially managed portfolios. It might be influencing the recommended lists that they share with financial advisors on guidance of some particular sectors or strategies or product solutions that they like. So I think overall the support structure for the product category is going to certainly increase with the rising popularity and there's still a lot of opportunity there. I think connected to that is that product development component. We've got the rise of active ETFs. There's certainly a number of different solutions again packaging complex things like options inside of these products to help advisors execute more effectively. That's another trend that will probably continue along in the future and then probably a little bit related to that. I think you're going to see some increased adoption on the SMA side as well as they might seek some more cost effective solutions to help them in the ongoing management of their portfolios.
Yie-Hsin Hung: Rob, it's been such a pleasure talking with you today. Thank you so much for sharing your thoughts and spending the time with us.
Robert Pettman: Thank you, much appreciated.
