Clients now understand exactly what they are paying for and have a range of investment tools available to them–is this affecting their investments...

Financial Advisory

27 November 2018

Advisory DistributorsBehavioursClientETFFinancial Advisory

Clients now understand exactly what they are paying for and have a range of investment tools available to them – is this affecting their investments preferences and how they go about constructing portfolios?


1. Clients now have a right under MiFID II to know exactly what they are paying for and their advisers have a range of investment tools available to them; is this affecting their investment preferences and how advisers go about constructing portfolios and to what extent do ETFs play a part for retail clients?

2. The rise of passive investing with the resultant downward pressure on fees along with the increased costs of research under MiFID II rules are squeezing profits margins, but ETF is not just about passive funds

3. Additionally, Socially Responsible Investing (SRI,)/Environmental Social Governance (ESG) are playing an ever-greater role in some clients’ investment preferences and it provides investment managers with an opportunity to build and sustain closer client relationships by demonstrating knowledge and professionalism.

Bursting common myths:

1. The ETF Industry is too big.

  • US$5trn has been invested in ETFs to date.
  • 80% of ETFs are passive and 20% are active and currently, ETFs comprise 6% of the corporate equity market, there being circa 4,000 ETFs, 6,000 mutual funds, and 8,000 securities.
  • It is still arguably a market still in its infancy and is projected to grow to US$30trn by 2030.

2. If the market drops, ETFs will suffer.

  • It is argued that ETFs have not been tested, but they have been think back to 2008-10.
  • The ETF is simply a wrapper and even when the market is down, ETF flows continue to persist as is evidenced by what took place between 2008 and 2010.

3. You (JP Morgan Asset Management) are late to the party.

  • The statistics show that ETFs are doubling every five years and if there is US$5trn in ETFs as of 2018, there is projected to be US$30trn in 2030 so ETFs are not yet being used to their full extent.

4. There is also a myth that there is a cost to ESG; it’s not the case.

  • JP Morgan have two elements to their ESG framework; integration (including advocacy), and exclusions
    ESG factors are an explicit part of the portfolio construction process; there is investor-led targeted ESG engagement as well as negative screening of selected issues and sectors.
  • ESG Integration & Exclusions: ESG factors are incorporated where material and relevant; there is positive engagement with companies on ESG issues, and negative screening of selected issues and companies. ESG factors are incorporated where material and relevant and there is positive engagement with portfolio companies on ESG issues.

Key challenges:

1. How should ETFs be promoted to the retail market?

  • The US market is already actually 50% institutional and 50% retail. ETFs are versatile and lend themselves to both markets.
  • JP Morgan are working in partnership with distributors to develop the market and focuses on, amongst other things:
    • Back-testing
    • Governance
    • Cost

2. How does the average investor understand and buy-in to ETFs?

  • JP Morgan work through others, specifically intermediaries, to promote the benefits and help them educate clients.
  • There may be a need to expand the breadth of partners to accelerate the process.

3. How are platforms being accessed?

  • This is work in progress and JP Morgan are taking the line of least resistance to build relationships

4.Could there be a backlash to ETFs?

  • Synthetics may be an issue and therefore how they are used needs to be carefully explained
  • There is a strong understanding about the responsibility to grow the market and reputational risk also needs to be managed

Conclusions and solutions:

1. The consensus was that education is the key constituent for advancing knowledge and use of ETFs.

2. ETFs are in place to provide investment solutions not just to seek to be attractive based on solely on cost.

3. There is an opportunity to further promote ESG by signposting ETFs that are overweight versus underweight in SRI investments.

Expert: John Adu, JP Morgan Asset Management

JP Morgan