Leave a comment

What Financial Planners and Their Clients Need to Know About the Latest ETF Investing Trends

Among the top goals for a financial planner is to maximize the investment return for their clients with an acceptable level of risk. Managing risk typically centers around diversification—not putting too many eggs into any one basket. Exchange-traded funds (ETFs) have proven to be an excellent vehicle for diversification due to the evolution of the ETF industry. It is probably fair to say that the growth of ETFs has been largely tied to the growth of the financial advisory industry and the democratization of investment advice and knowledge throughout our economy.

The FPA and Journal of Financial Planning Trends in Investing Survey found that 88 percent of advisers surveyed currently use or recommend the use of ETFs with clients, and 45 percent said they plan to increase the use or recommendation of ETFs in the next 12 months.

The largest ETFs are based on indices, funds that are designed to track asset classes and sectors within those asset classes. Financial planners typically recommend exposure to both equities and fixed income securities, and diversification among sectors of the economy and different economies around the world. ETF issuers have met this demand with index ETFs covering virtually every asset class, market capitalization, sector and geographic subdivision of the world economy.

New ETFs continue to be created with a trend toward applying a different angle, smart beta or active strategy, or implementation of investment philosophy to offer new twists on existing themes. The FPA and Journal of Financial Planning Trends in Investing Survey found that a majority of planners surveyed continue to favor a blend of active and passive management.

ETFs seem to be the vehicle of choice for the average consumer, with the notable exception of defined-contribution retirement plans. ETFs have a structural advantage, especially for taxable shareholder accounts. Financial advisers will likely continue to shift toward increased use of ETFs.

As the ETF industry continues to grow and evolve, three themes are dominating headlines today:

1.) Cannabis funds

There are currently four or five cannabis funds in the marketplace, with at least three more in registration. One cannabis fund already launched this month and another is expected to go effective in the coming week, issued by Innovation Shares and Amplify ETFs respectively. Most observers tend to believe there is space in the market for several funds, especially because each has a slightly different approach. Innovation Shares offers an index fund and Amplify ETFs plans an active strategy, for instance. As analysts begin to compare the funds and their styles, many believe the oldest fund, the ETFMG Alternative Harvest ETF (MJ), will suffer loss in assets as its alignment with the actual cannabis industry is thin at best. Time will tell, but the cannabis sector certainly has created a buzz.

2.) Non-transparent ETFs

ETFs that do not disclose their actual portfolio has been a goal for many portfolio managers, many of whom seem to believe that the rest of the portfolio management industry is anxiously trying to find out “just how they do it.” There is very little, if any, demand by the actual investor buying the ETF. To the extent a non-transparent ETF might coax a hesitant portfolio manager into offering an ETF, the investing public can potentially benefit.

Past efforts, particularly the NextShares program put together by Eaton Vance, have had decidedly mixed results. The overriding opinion from recent industry conferences on the subject seems to tilt toward an increase in ETF filings and new offerings. Whether the new filings will result in significant new assets in those non-transparent ETFs remains to be seen.

3.) Race to the bottom on fees

For index ETFs, there may be additional gimmicky entrants to the space touting low or zero-fee products. A careful consumer will need to determine how the ETF will compensate its issuer, as there is no such thing as a free lunch. Portfolio transaction fees, which are included in the portfolio performance rather than the expense ratio, are one source. Revenues from lending portfolio securities can also generate fees.

ETFs will likely continue to increase as a percentage of most financial planners’ and wealth managers’ asset allocation models.

Kip Meadows.jpg

Kip Meadows is the founder and CEO of Nottingham, a fund administration firm and white-label ETF issuer headquartered in Rocky Mount, N.C. Meadows has more than 30 years of experience servicing the fund management, administration, accounting and organization needs of clients nationwide.  

1 Comment

Is the Global Space Economy the Next Big Investment Theme for Clients?

Today, the global space economy is estimated to be worth $384 billion. By 2040, Morgan Stanley estimates that value will nearly triple, reaching $1.1 trillion. Bank of America Merrill Lynch is even more aggressive in its projections, suggesting the space economy could represent as much as $2.7 trillion by 2045.

This presents a huge opportunity to capitalize on the future expected growth of a sector that—up until recently—has been largely off limits to the average investor. Baby boomers, millennials and Generation X have all been captivated by the “final frontier,” and may soon want to explore these investments further.

Advisers may not be able to ignore such opportunities if investor demand grows. It is crucial to understand the value of investing in space and where clients can turn to gain access to this emerging sector.

Here are three key reasons why now may be the time to invest in space:

1.) Trade wars fueling government investment

Recent news from Washington, D.C., paints a promising picture about the future of the Space Force, a proposed sixth branch of the U.S. military that would organize, train and equip military space personnel. Although the details of the Space Force are still being negotiated, President Donald Trump and key members of the House and Senate all recognize the importance of American defense capabilities in space. By creating a Space Force that operates independently of the Air Force, greater emphasis could be placed on space-related career paths and space acquisition programs. From an investment perspective, this could lead to more robust defense spending on space-related hardware, software and services, especially at a time when trade wars are shining a spotlight on protecting national interests and security.

Governments are also looking to buy services from private companies rather than specifying or building their own systems. In one recent example, NASA awarded contracts to commercial companies that will transport NASA science instruments to the lunar surface. This approach is intended to stimulate creative commercial solutions to government challenges, essentially creating a new kind of “space race” that could result in powerful new capabilities that create value for non-government customers as well.

2.) Commercial revenue growth

The majority of future growth in the global space economy will likely take place in the private sector, as was the case over the past decade. Today, private industry already accounts for 80 percent of the space market. While governments continue to sponsor space-related initiatives for science, exploration and defense, private industry leads the way in addressing the needs of businesses and consumers.

Traditionally, private companies have encountered barriers to entering the space market due to high costs associated with the sector. However, many types of satellites can now be manufactured inexpensively due to advances in electronics. On a different front, the introduction of reusable rockets has contributed to a drop in launch prices, increasing the accessibility of space. In addition to these innovations, global space policy has become more defined, offering commercial entities greater legal and regulatory clarity about how they can operate in space. This significantly reduces the risk of investing in space, another catalyst for commercial investment.

Commercial opportunities to invest in space will continue to expand as products are developed for interplanetary exploration. While the idea of lunar colonies and asteroid mining may seem far-fetched today, robotics, artificial intelligence (AI) and reusable spacecraft are rapidly changing our approach to the formerly insurmountable challenges of space.

3.) Disruptive technologies reliant on space-based systems

Space-related systems have become the toll operators for the data superhighway. Satellite-enabled navigation (such as GPS) is the driving force behind the ridesharing apps and location-based delivery services that have opened entirely new markets on Earth. Satellite-based technology also fundamentally influences disruptive investment themes like 5G, the Internet of Things (IoT), machine learning and cloud computing.

The pioneers who invest in these transformative technologies believe the amount of data created and utilized for these applications may expand exponentially. Companies developing the infrastructure necessary for the transfer of all this data will be instrumental to successful operation, and as such, are well-positioned to benefit from the expected growth of each of these industries.

Other industries have had profitable “toll operators” as well. Rail providers, for example, have been critically important to the movement of physical goods for more than 100 years. Today, the world is driven by digital assets and goods, and space-related systems make their transportation and communication possible.

The growth of the global space economy over the next 20 to 25 years will incorporate many industries including technology, manufacturing, biotech and mining, as well as areas we have not yet envisioned. The opportunity for investors is far-reaching and evocative of any major industry at its inception state, such as when Ford debuted the Model T or when initial iterations of the internet appeared.

Introducing your clients to satellite-manufacturing companies and other space-related technologies could offer a way to capitalize on the opportunities in this sector today and for years to come. The “space revolution” is upon us, and your clients cannot afford to ignore it.

Editor’s note: Want to see more about the trends in investing clients are asking about and your fellow planners are exploring? Check out the FPA/Journal of Financial Planning Trends in Investing Survey findings

Andrew Chanin is the co-founder and CEO of ProcureAM, a wholly owned subsidiary of Procure Holdings, LLC. ProcureAM is a new exchange-traded product (ETP) issuer behind The Procure Space ETF (NYSE Arca: UFO), the world’s first global ETF to give investors pure-play access to the expanding space industry.  


1 Comment

Retirement Planning Lessons for Emerging Advisers

The leading edge of the baby boomer generation turned 65 back in 2011. Since then, we’ve watched a large percentage of the adviser population move closer to that traditional retirement age. But the transition to retirement has been anything but traditional, as many boomer advisers have chosen to remain ensconced at their firms. It has created an interesting dilemma for emerging advisers waiting to move into more prominent roles. Should we worry about history repeating itself when these emerging advisers age? If so, what lessons can the younger generation learn from watching boomer advisers (not) retire?

Setting the Stage

First, it helps to understand the reasons boomer advisers are increasingly choosing to stay in the business.

It’s not your grandmother’s retirement anymore. The Bureau of Labor Statistics predicts that the percentage of 65- to 74-year-olds actively looking for work will increase faster than any other age group through 2026. When you think about it, it’s not particularly surprising. After all, we’re living much longer than was thought possible when the retirement age was conceived back in the 1930s. In fact, the notion of retirement is outdated—it’s becoming much more of a life pivot.

Retiring successfully isn’t just about money. Health and wellness, family relations, leisure and social activities, and personal growth and development are all important. And everyone copes with the question of what’s next differently. The thought of leaving something behind if there isn’t something more profound to move forward to can be paralyzing.

Boomers come from an era that embraced “living to work” as opposed to “working to live.” Work has been the centerpiece of life. Professional achievement and financial compensation have prominent spots on the self-worth scorecard. Advisers have poured their heart and soul into building a business and serving their clients, making many sacrifices along the way. Plus, these advisers have seen and heard firsthand the difference their advice has made on the quality of others’ lives. Who wouldn’t want more of that?

It’s their identity. When boomer advisers were young, they juggled the responsibilities of creating a family and growing a business simultaneously. Then they reached the point where something had to give. Often, it was the passions of an earlier life—hobbies, sports, socializing with friends. After the kids left home, satisfaction was derived from the work itself, rather than from rediscovering those lost passions.

Founderitis is real. Whether consciously or not, a failure to delegate keeps founding advisers in a power position. Rather than developing the next generation of leaders, they hold tightly to responsibility. But none of us can go on indefinitely, which means the business tends to pay the price.

The Lessons in the Data

Nature, nurture and circumstance have all played into the industry landscape we see today. It’s not that it’s a bad thing necessarily, but it has created challenges both for boomer advisers struggling with how to pivot to the next stage and for emerging advisers who are more than ready to take the reins. It also offers some lessons that emerging advisers may want to take to heart as they develop a vision for what they want their life and career to be.

  1. Broaden your horizons. Be careful that work does not become the one and only focus of life. Spend time with your family, nurture your passions and hobbies and try to ensure that fun is an ingredient in everything you do.
  2. Be careful about scorecards. The industry lists many advisers aspire to be named to include quantitative criteria like AUM and wealth of clients served, not qualitative data like family dynamics, life enjoyment or how you give back to society.
  3. Expect to pivot. Emerging advisers have seen firsthand how some boomer advisers are struggling with retirement. This industry is changing fast. A long-term career will undoubtedly include even more pivots than your older colleagues have experienced.
  4. Hire people who are smarter than you and delegate to them if you want a business that will outlast you. That means reinventing yourself to add new leadership value.
  5. Check your attitude and behaviors. Be open to new opportunities.

What does this really say? Build a life—not just a career—and then work hard to protect it!

Joni Youngwirth_2014 for web

Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network in Waltham, Mass.