The latest Intelligent Adviser podcast is now online and features an interview with Edward Ware from S&P Dow Jones Indices. Ed is Senior Director in S&P's Financial Adviser Channel Management division, based in New York City.
In the interview, Ed talks about the growing popularity of low-cost index investing in the United States. He explains why, in his view, it's a trend that has barely begun and why he expects passive investing to take off all around the world.
He also discusses the advantages for financial advice firms of having a passive investment strategy. Primarily, he says, it gives them more time to spend on areas where they really can add value, particularly financial planning.
He also says how using index funds allows advisers to focus more on business development and scaling up. Firms whose value proposition continues to revolve around beating the market, he says, are at risk of being left behind.
Here are some of the highlights:
Advantages of indexing for advisers
More time to focus on what’s important
“(Indexing means you) can focus on the part of the value proposition that is individual to the adviser, which is the financial plan. That’s what keeps clients close, (not) staking your reputation on the performance of an active manager.”
… and on business development
“(Indexing) gives advisers more time for business development. If you’re competing in a fee-sensitive environment, you have to scale up. If you’re spending all your time on portfolio management and manager selection, you may find yourself left behind.”
Advisers who focus on beating the market risk irrelevance
“I think the American general Eric Shinseki said it best when he said, ‘If you don’t like change, you’re going to like irrelevance even less.’”
“Advisers (using active management) are having a harder and harder time defending their value proposition. We’re (helping them) get that monkey off their back — having to beat the market by using active managers.”
Why so many advisers still prefer active
“The average age of an adviser in the United States is about 55. They’ve had these client relationships for decades. To change their messaging is very difficult for them.”
The growth of indexing in the US
“Investors in the US are becoming more fee-conscious by the day. Cost-conscious investors are gong to demand less expensive and more transparent solutions.”
“In the US, the mutual fund industry is still roughly five times the size of the ETF industry. We see passive taking more and more market share from active. It’s just a natural outcome as investors become more educated.”
You can listen to the podcast now, either on SoundCloud or iTunes.
Please do leave a comment and, even better, a review.
Intelligent Adviser Episode 10 on SoundCloud
Intelligent Adviser Episode 10 on iTunes