Andrew Craswell: Hello. Welcome to Brown Brothers Harriman’s (BBH) Client Insight Series. My name’s Andrew Craswell and I’m part of the Global ETF Services Team at BBH located in London. Today we’re going to talk about the results of our European Investor Survey. And I’m delighted to be joined by Matt Hougan, CEO of Inside ETFs.
We surveyed a 180 financial advisors, intermediaries, and investors in ETFs to gather their insights and sentiment towards ETF investing, Matt, welcome and thank you for your time.
Matt Hougan: Thanks for having me.
Andrew Craswell: ETF assets in Europe have surpassed €500 billion recently. But smart beta assets are only a relatively small proportion of that. Now, the results of the survey indicated that 70% of investors plan to increase smart beta allocation over the next 12 months. Do you think 2017 is going to be the year that we really see growth in this segment of the market?
Matt Hougan: I do think it’s going to be a significant year of growth. We’ve been hearing about smart beta for a number of years. Investors have been learning about it and what we saw in the survey is that last year they dipped their toes in the water. If you looked at the percentage of peoples’ portfolios that was held in smart beta ETFs, it was small, 5%, 10%. That’s advisors testing it out to see if it works in practice and not in theory. I think you saw good results in smart-beta products last year. And that’s going to translate into people really stepping into the market next year. People need alternatives to traditional active management. And they want possibly better risk adjusted returns than traditional index products and smart beta threads that needle. And I think you will see a real acceleration of assets in 2017.
Andrew Craswell: And I think that’s a really interesting point you hit there. I think more and more investors are actually viewing smart beta as an alternative to an active fund that they may have bought previously. So I think that’s a very strong theme. I think the second theme that would be good to get your insight around is ESG, again another term that’s being bandied about. Assets are relatively small at this stage, but again more than 50% of respondents to the survey indicated that they’re using ESG factors when making investment decisions going forward. So again in that camp of hype or not, where do you see the evolution of ESG and ETFs?
Matt Hougan: That’s a great question. I think we’re still a little earlier in the ESG cycle than we were in the smart-beta cycle. But the reason you saw that 50% result is advisors are being pushed by their clients, right, they’re being told they have to consider them. So I think what you’re going to see in 2017, you’re going to see a lot of new ESG products.
Andrew Craswell: Yes, very much what we’re seeing from the results from an indicative perspective. I mean we touched upon two areas of product there and where product innovation is coming into ETFs. One of the areas that I think is on everyone’s mind is that of distribution now, in terms of getting products to end investors and how that’s happening. One of the areas that again a lot of people are talking about is robo advice and the automation of financial advice coming into the market. The most interesting data point that came out of the survey was actually that 54% of respondents see robo advice as an opportunity for their business as opposed to a threat where they may potentially be disintermediated. What’s your view on where the opportunity is for robo advice, not only from the manufacturers of the products, but from the perspective of the end users as well?
Matt Hougan: I found that 54% really insightful and really hopeful for me. Robo advice should be a bonus for advisors, right. What advisors provide to clients is not just an asset allocation portfolio, that’s just a sliver of the value they deliver, right. The most of the value they deliver is on shaping client behavior, it’s on financial planning and tax. Robo advice is just a more efficient way to deliver asset allocation strategies, rebalancing strategies, and portfolio management.
Advisors who leverage that to deliver world class portfolios simply and easily and then can provide the kind of top services that people really value. Those are the people that will grow their business. If you’re an advisor who’s putting all of your weight just on the portfolio allocation, you are going to be disintermediated. But if you can leverage that to scale your business and then add value where you can truly differentiate and provide personal service to clients, tax, planning, and behavioral coaching, you’re going to be hugely successful. So I think that 54% should be a 100%, but I’m glad it was at least half.
Andrew Craswell: Thank you for your time, Matt, and thank you for watching. So we touched upon three important themes of growth in the ETF market for 2017 and beyond.
To view the full survey results please visit www.bbh.com/etfsurvey.
The positions expressed in this material are those of the author as of December 9, 2016 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only. Furthermore, these positions are not intended to predict or guarantee the future performance of any currencies or markets. This material should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision.