In the course of a 26-year career evaluating money managers and helping fund companies tweak investment strategies, William Koehler has seen up close some of the best stock pickers that Wall Street has to offer.

He has worked with the likes of Bill Gross, Foster Friess, Ted Aronson and Jeremy Grantham.

Now, the 47-year-old Koehler is shifting career paths. After spending the past 12 years as vice president of investment oversight at American Century Investments, he's joining ETF Portfolio Solutions. The suburban Kansas City advisory firm's client base represents just a blip compared to the mutual fund giant's $100 billion or so in assets under management.

But that doesn't bother Koehler. After providing oversight to some of the world's top managers, first at pension consultant DeMarche Associates and then American Century, he has become convinced that passive investing through exchange-traded funds is the wave of the future.

"The more you look and learn, the more compelling passive investing becomes using ETFs," Koehler said.

'Revolutionary Innovation'

He views ETFs as nothing short of revolutionary for individual investors. "Other than Ted Benna coming up with the 401(k) in 1981, ETFs are the most important financial innovation in the past 30 years," Koehler said.

Besides being more cost-effective and tax-efficient than most mutual funds, he says ETFs can serve as a more liquid and precise way for investors of all sizes to gain access to different markets.

"I don't want to slight any of the professionals I've been fortunate enough to work with over time," Koehler said. "I've worked with some superb investment professionals."

At times, he has seen resourceful managers beat their benchmarks, Koehler adds. "But predicting who they'll be at any given point in time is extremely difficult," he said. "I don't know anyone who can do that on a consistent basis."

Although jumping from a major mutual funds player, Koehler's clearly joining a growing, yet still wide-open part of the advisory marketplace.

In 2007, a typical advisor had 4.5% of his or her client assets in ETFs. Fee-based advisors had slightly more, around 6%. Advisors working mainly on a largely commission basis averaged about 1% invested through ETFs.

ETF Portfolio Solutions, which was founded by author Rich Romey, is a fee-only advisor.

"Mutual funds are far and away still the most popular products used by advisors," said Bing Waldert, an associate director at Cerulli Associates.

ETFs as Upstart

But the upstart ETFs are expected to keep growing, as they've been doing for almost a decade now, at a much greater rate.

Mutual funds are projected to produce annual net sales growth averaging 1.9% in the next five years, according to Financial Research Corp. By contrast, the firm's forecasting that ETFs will expand by an average 17.1% per year.

Mutual funds are currently getting about 47% of all dollars flowing into the market. That includes competitors ranging from managed accounts and hedge funds to closed-end funds, variable annuities and ETFs.

In five years, that market share number is expected to drop to 35%. At the same time, ETFs are projected to go in the other direction, from 11% today to 16%-about a 50% increase.

"The ownership of individual stocks has been dropping over the years," said Koehler, who was originally trained as a securities analyst. "So even though they're coming from a smaller base, ETFs are clearly going to be the most popular mainstream investment vehicle in coming years."

As advisors become more familiar with ETFs, he adds, "the inherent qualities of ETFs will gain more recognition with both investors and advisors."

But another wind is blowing in the direction of advisors like Romey and Koehler.

Fee-Based Shift

In the past decade, the financial advisory business has been steadily shifting to fee-based services. That means instead of working with advisors who make money through commissions, investors are choosing to pay a predetermined set rate.

"It's definitely in everyone's best interest that the market's going to a fee-based structure," Waldert said, noting fewer conflicts of interest for investors in the new market environment.

And the changes are coming rapidly. In 2002, some 34% of U.S. advisors received most of their compensation from fees, says Cerulli. By 2007, that was up to 54%. "We expect that pattern to continue in coming years," Waldert said. "There are only a handful of products today available on a commission-only basis."

The rise of fee-based planning is good news for advisors favoring exchange-traded funds, he adds.

"Fee-based advisors are more process-oriented. The relationship involving commissions tends to center around making the next transaction," Waldert said.

With the growing popularity of fee-based advising, ETFs are becoming favorites of advisors to replace stocks in portfolios, he says.

"While they're turning to ETFs as core holdings to replace index mutual funds or actively managed large-cap mutual funds," Waldert said, "we're also seeing them turn to ETFs as alternatives to individual stocks to gain access to more niche markets."

Murray Coleman is managing editor at IndexUniverse.com. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it