10.03.2018

ETFs Pressure Buy Side

As ETFs skyrocket, asset managers who don’t adapt risk being left behind
By Joseph Cordahi, Front Office Pre-Sales Manager of NeoXam

Joseph Cordahi, NeoXam

As Exchange Traded Funds (ETFs) become increasingly mainstream, investors haven’t hesitated to jump on the bandwagon. In fact, in July ETFGI found that assets invested in ETFs and Exchange Traded Products (ETPs) have reached $5.12 trillion, compared to $2.16 trillion in 2013.

While this is a positive move for investors, it has also put the squeeze on asset managers, who now find themselves under increasing pressure to justify their fee structure. This, coupled with the rise of social media causing people to expect information to be easy to access and available to them in real time, means that they have to be more transparent about where investors’ money is going, or risk losing their clients to the passive investment revolution.

Two fee structures, both alike in dignity

While asset manager fee structures have largely gone unchallenged in the past due to a lack of alternatives, the rise of ETFs has thrown them under the spotlight. This is due to their generally low annual operating expenses – with some charging as little as 0.03%, compared to an average of 0.78% for actively managed funds.

This has created a new generation of investors, who are increasingly cost-conscious, and therefore more likely to call the fees charged by asset managers into question. With ETFs as an accessible alternative, investors need to be assured that they will receive a significantly better service if they choose to invest with an asset manager rather than a passive fund.

Transparency is key

However, the challenge lies beyond just the cost issue. The impact of MiFID II must be considered. While the regulation only applies to the EU, the global financial industry has seen a change in mindset since it’s implementation, with greater expectations placed on asset managers to justify their decisions.

It’s clear that asset managers need to make some changes in order to stay competitive. At the centre of this lies the need for transparency. The rise of ETFs, the implementation of MiFID II and the social media phenomenon all mean that investors who are prepared to spend more money on management fees now need evidence that they are getting more value for their money. They not only expect more information about where their money is going, but also expect it to be easy to access and available to them in real time.

As a result, asset managers are turning to new ways to keep their investors up to date on the performance of their fund. This no longer simply includes traditional methods like face-to-face meetings, they also need to be tech savvy. Examples of this can include real time data on their websites, or even mobile apps for their clients which can convey portfolio performance and the level of risk that is undertaken.

Historically, the buy-side has been quite slow to adapt to technological change in comparison with the likes of brokers and banks, but this time it isn’t an option. The rapid growth of the passive investment industry, along with regulatory developments and the birth of a more tech-savvy, information-oriented investor, mean that active managers need to work harder than ever to demonstrate their value, or risk being left behind.

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