Trading platforms used by independent financial advisers in the UK are seeing rapidly growing interest in exchange traded funds ahead of the UK’s retail distribution review.
David Bower, head of iShares UK, said the ETF industry would be a major beneficiary of RDR which will ban commission payments to financial advisers from the beginning of 2013. ETFs, unlike many other investment funds, do not pay commissions to advisers.
Mr Bower said the strong growth that iShares saw on wrap platforms in 2011 suggested that ETF usage amongst financial advisers and discretionary fund managers would continue to rise.
BlackRock saw assets held in iShares ETFs across six wrap platforms used by IFAs increase 34 per cent in 2011 to £746m at the end of December.
The six platforms are run by Ascentric, Novia, Nucleus, Raymond James, Standard Life and Transact.
Novia saw assets held in iShares ETFs increase 96 per cent last year while Ascentric reported an 88 per cent rise.
Paul Boston, sales and marketing director at Novia, said that ETFs were playing an increasingly important role in both advisory and discretionary portfolios on the Novia platform.
“This is proving to be a well-trodden investment strategy that significantly reduces the overall cost of a client’s portfolio,” Mr Boston said.
Bill Vasilieff, chief executive of Novia, said new inflows into ETFs on the Novia platform rose 48 per cent last year, taking assets to £50m. Most of the assets are concentrated in physical ETFs with very little in synthetic ETFs which use derivatives.
Mr Vasilieff said advisers had shown interest in ETFs spread across a wide range of asset classes and he expected this to accelerate once RDR was implemented as active funds may no longer be allowed to pay rebates to fund supermarkets.
Glen Sweet, head of sales at Transact, said: “we saw a significant increase in interest in ETFs among advisers on the Transact platform last year”.
Mr Sweet said he expected further strong growth following RDR but he cautioned that some advisers were still relatively unfamiliar with ETFs, compared with mainstream investments such as unit trusts, OEICs (open-ended investment companies) and shares, so it could take time for them to become more widely used.
Andrew Power, lead RDR partner at Deloitte, said the implementation of RDR would shake up the investment market more than many fund managers realised.
“The ending of commission payments for recommending funds and the switch to adviser charging will make consumers more sensitive to fund charges. That will challenge active fund managers who cannot demonstrate outperformance. If they cannot reduce their fees it is likely advisers will recommend cheaper passive funds.”
Hugo Thorman, managing director at Ascentric, said the number of clients using ETFs on the Ascentric platform nearly doubled to 6,390 in 2011 while the number of ETF transactions surged 155 per cent to 208,000.
The number of IFA’s using ETFs via Ascentric rose 37 per cent to 260.
Mr Thorman said ETFs appealed to financial advisers and discretionary fund managers because of their low cost and the access they provided to so many different asset classes.
“Many advisers and discetionary fund managers appear to be using ETFs both as complete passive propositions and also as a way of reducing the cost of core holdings in otherwise actively managed model portfolios,” said Mr Thorman.
The top selling iShares ETFs across the six wrap platforms showed investors looking for income related plays in corporate and government bonds as well in property and UK equities.
The most popular seller across the six wrap platforms was the iShares Markit iBoxx £ corporate bond 1-5 year ETF, a UK corporate bond fund, which gathered £42m in net flows last year.
The iShares FTSE gilts 0-5 year ETF, a UK government bond fund, saw nearly £34m in net inflows.
From the property sector, the iShares FTSE EPRA/NAREIT developed markets property yield ETF, registered inflows of £18m.
Interest in the iShares FTSE UK dividend plus ETF matched that in the iShares FTSE 100 ETF with both attracting inflows of £13m from the six wrap platforms last year.
Wrap platforms remain a relatively small part of the UK market which is dominated by institutional investors. Net new inflows into exchange traded products with their primary listing in the UK slowed to $9.9bn in 2011 from $17.6bn in 2010, according to BlackRock while assets under management for all UK primary listings increased 0.7 per cent to $94.04bn at the end of December.
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