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Earlier this week, Julian Hince, Senior Business Development Officer for the independent financial adviser sector at iShares Europe, spoke to Paul Amery of IndexUniverse.eu in a telephone interview.
IU.eu: Julian, you’ve spent most of your career in the active fund management business. What prompted the switch to ETFs?
Hince: Yes, I spent 17 years with active fund managers but when the call came from iShares I didn’t really have to think about it for long. If you’re in the marketplace and speak to practitioners you’ll know that passive investment and ETFs are a significant growth industry.
IU.eu: iShares has talked a lot about the importance of the FSA’s Retail Distribution Review (RDR) in pushing more UK financial advisers and their clients towards the use of ETFs in their portfolios. How big do you think the retail sector in ETFs could grow to be?
Hince: In the US, around 55% of iShares’ assets under management come from what we call the wealth or retail sector. In Europe the balance is still 80% in favour of institutional investors. Seven or eight years ago there was a big shift towards fee-based advisory work and greater transparency in that sector in the US and it led to a big increase in the use of ETFs. Some of the same drivers are clearly in place in the UK now and the RDR and its promotion of transparency are part of that. But there are other drivers as well – it’s much easier to access ETFs today than it was a few years ago. Fee-charging advisers are much more likely to use wrap platforms, for example, and iShares ETFs are now available on all the major ones.
IU.eu: On the subject of wraps, what do you make of the recent comments by Peter Jordan of Skandia that once you add the cost of the wrap platform to the ETF fee, owning ETFs is not that much cheaper than owning actively managed funds?
Hince: First of all, any product choice should be primarily about the investment itself (i.e. whether to be invested in a given market or asset class at a given time) with the cost of the investment a secondary consideration. When looking at the overall cost of an ETF you have to include the fund’s total expense ratio plus any costs associated with trading as a result of the way the index is constructed. Then, whether you buy your ETF via a wrap platform or stockbroker, you will have to pay the associated charges. There will probably be the cost of a financial adviser to add on as well.
One of the things we can try to do as an ETF provider is to help reduce some of the costs. For example, we return 50% of any revenue generated from securities lending to the fund. In some cases, this can make a significant difference to returns and to offsetting the fund charge. All this information is disclosed on our website.
IU.eu: Let’s focus on the parts of the costs chain that you don’t control. What’s the typical cost of a wrap platform?
Hince: A rough estimate of a wrap platform's cost is in the 30-50 basis points (0.5%) per annum range, but this can vary. There may also be transaction costs − possibly £12-15 per deal. Some of the platforms, though not all, aggregate investors’ deals. For example, 100 investors buying the iShares FTSE 100 ETF would split the trading cost between them if the platform aggregates the deals. Investors should do their homework here.
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