Speaker Interview: Piers Bolger – Don’t blame advisors for the ETF fee war

Piers Bolger is the CIO of Viridian Advisory, one of Australia’s most influential financial advice businesses.  Speaking to ETF Stream ahead of the ETFs Down Under conference, Mr Bolger discusses how financial advice has changed since the GFC and how advisors came to be the driving force behind Aussie ETFs.

ETF Stream: Michael Kitces, the guru to American RIAs, has this podcast about how every successful product innovation in investing the past 50 years have answered the questions: “How do advisors get paid?”, “How do advisors justify their pay by providing better services?”. When you look at the growth of ETFs in Australia, do you think the same is true here?

Piers Bolger: I wouldn’t put it down to that reason at all actually. The rise of ETFs from where we sit has really been driven by two things.

Firstly, advisors trying and failing to be portfolio managers and no longer wanting to do that. In our view, the pain of the GFC and the associated difficult client conversations shifted the pendulum away from advisors positioning themselves as investment professionals back towards delivering more strategic and holistic advice for clients. Index products provided a solution for advisors who no longer thought that they were very good (or had the desire to) at picking stocks or selecting fund managers.

Secondly, index solutions assisted the conversation about the advisor’s value proposition and fees. Advisors wonder: how do I provide value if I’m no longer an investment guru on behalf of a client’s portfolio? While clients think: if I’m just buying the market then there has to be some fee dissociation with that.

Media outlets blame advisors for the fee war in passive investing. While advisors, when asked, often say: “look, we don’t really care that much about small differences in ETF fees.” Where do you see the blame lying?   

I think it comes back to your first question.

Some advisors have struggled to articulate a value proposition. For many advisors they want to primarily be investment managers and with that, in today’s market, comes a strong focus on end cost for clients. But really, in our view, an advisor’s main value is building relationships with and creating strategies for their clients, and then evolving those as their clients’ needs change over time.

For us at least we don’t really get too caught up on small differences in fees. We focus on the ‘value’ that we are delivering to our clients and whether our clients appreciate the efforts that we undertake to meet their needs. In our view clients are happy to pay for a quality service.  It’s not about the lowest cost.  So I think the press has things slightly wrong there.

I’d imagine ETF providers are trying to pitch you guys products all day long. What do you look for when choosing products?  

It depends on the client and the market. But generally, diversification is very important. So if two ETFs nominally provide exposure to the same market we prefer the one that’s better diversified. In a similar vein we’re also looking at the replication strategy: i.e. is the ETF fully replicating the index its tracking or is it using sampling. Again, sampling strategies lower diversification.

You then want to understand what type of volume is likely to go through that ETF and how it will affect the trading and spreads, particularly if you’re looking at illiquid markets like emerging market debt and global small caps. You want to know what the spreads look like and how they’ll flow through in stressed market situations.

The other thing is what’s the absolute size of the ETF. Is it a market segment where the ETF can impact the underlying market due to its sheer size.

Some people think unlisted funds are better for indexing than ETFs because it’s easier to buy in at NAV, you don’t have to worry about spreads moving against you, or depend on market makers. Do you think there’s certain instances where unlisted funds are better than ETFs? 

A lot of the ETF weaknesses you describe also apply to unlisted managed funds. They have spreads: they’re just built in. In low liquidity environments they also have to worry about [forced] selling to satisfy redemptions. By going the unlisted fund route you don’t eliminate spreads or market participants trading against you. Rather it just gets built into the fund.

A lot ETF providers are trying to flog model portfolios because it allows them to hit scale quickly. What do you think of the alternative single ticker multi-asset route taken by Vanguard (VDHG, VDGR, etc.)?

We prefer the multi ticker solution because it gives us more flexibility and better enables us to build asset allocation towards the strategy we’re trying to delivery. Every client is different and the single ticker approach does not as easily cater for client differences. Multi ticker also allows us to change strategy as client preferences change, or to adjust to different market environments.

If you were to knock on the door of any ETF provider and ask: build this ETF, we need it. What would it be?

That’s a good question. I think if we’re looking at the market at the moment the ability to get into illiquid assets or alternatives could be developed further. There are relatively few alternative strain ETF solutions.

However, generally speaking, most of what we want to have access to we’ve got.

Thank you for this interview.

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Piers Bolger is the CIO of Viridian, an advisor and client-owned financial advice company. He will be speaking at the ETFs Down Under conference in Sydney on 16 October.