Bringing trailer fees to ETFs
Not to long ago, I was watching an interview of Som Seif, CEO of Claymore Investments, on Jonathan Chevrau's http://www.wealthyboomer.ca/. Myself...I have a great respect for the passive management approach (taking advantage of ETFs and index funds), and Claymore is one of the very few players in the industry (the other being Barclays iShares and Horizon Beta Pro). Claymore has blossomed in an arena where both TD and StateStreet have entered and dropped out.
The argument of passive vs. active management isn't one to be made for this blog entry, and it, unfortunately, hasn't really reached a fevered pitch within the broader retail investment industry. Regardless of this, the emergence of ETFs, in the last few years, has been an incredible feat. It has been remarkable to witness the amount of advisors themselves approaching their clients with the notion to access these funds, although it means having to visit the fee-based model with no trailer fees. It served as a reminder that there are a good many advisors out there that want the best for their clients (STANDUP advisors as my virtual mentor, John De Goey, calls them).
However, recently, Claymore added an Advisor-Class ETF where trailer fees(embedded compensation) will be paid out to financial advisors. This is something that hasn't been done in the past and, as Seif conceded, the SEC doesn't allow Claymore to do such a thing in the United States. Is this useful? It will definitely get more advisors aboard getting their clients to recommend ETFs. Since this innovation, the only optimum choice a financial advisor had in getting their clients into ETFs was adopting a fee-based compensation structure. This method of charging their clients upfront as a percentage of their portfolio greatly enhanced the transparency between the client and his or her broker. Intuitively, I believed that the rise of ETFs and index funds would have proved an excellent vehicle to making fee-based compensation more mainstream.
This changed with Claymore's recent move. "The benefit of the dot A is it allows advisors to now use them across their books, but, more importantly, it allows them to have the conversation about the ETFs to move their clients to a fee-based platform," Seif told Chevreau. Honestly, does he really believe that? If the advisor has an embedded fee option, it sort of avoids having to have that conversation about the benefits of fee-based compensation. Clients have been programmed for so long to not having to look at certain fees that it really is a challenge for advisors getting them to see the benefits.
Will the other ETF firms follow suit? I hope not. Barclays iShares has done something more in line with the Onus ideology and that's simply to educate. Their recent ad campaign points out problems in the client-broker relationship and the broader retail investment industry, including my favorite: "Canada has the highest MERs in the developed world. Should your clients care?"
All this being said, Seif's reasoning is that ETFs are great products, and if clients are being steered away from them because of a lack of trailer fees, then something should be done about it. It must be mentioned that I, admittedly, have a genuine respect for Som Seif. A respect that extends outside the retail investment industry. Seif accomplished the feat of setting up Claymore Investments all the while coaching the U of T water polo team to a championship season (his third one in fours years). He admitted doing it at the expense of having to cut some of the team's more promising players because he didn't want to jeopardize the team chemistry. A risk-taker. A great coach. A genuine leader in my books.
However, in this case, I feel he's leading the wrong way.
The argument of passive vs. active management isn't one to be made for this blog entry, and it, unfortunately, hasn't really reached a fevered pitch within the broader retail investment industry. Regardless of this, the emergence of ETFs, in the last few years, has been an incredible feat. It has been remarkable to witness the amount of advisors themselves approaching their clients with the notion to access these funds, although it means having to visit the fee-based model with no trailer fees. It served as a reminder that there are a good many advisors out there that want the best for their clients (STANDUP advisors as my virtual mentor, John De Goey, calls them).
However, recently, Claymore added an Advisor-Class ETF where trailer fees(embedded compensation) will be paid out to financial advisors. This is something that hasn't been done in the past and, as Seif conceded, the SEC doesn't allow Claymore to do such a thing in the United States. Is this useful? It will definitely get more advisors aboard getting their clients to recommend ETFs. Since this innovation, the only optimum choice a financial advisor had in getting their clients into ETFs was adopting a fee-based compensation structure. This method of charging their clients upfront as a percentage of their portfolio greatly enhanced the transparency between the client and his or her broker. Intuitively, I believed that the rise of ETFs and index funds would have proved an excellent vehicle to making fee-based compensation more mainstream.
This changed with Claymore's recent move. "The benefit of the dot A is it allows advisors to now use them across their books, but, more importantly, it allows them to have the conversation about the ETFs to move their clients to a fee-based platform," Seif told Chevreau. Honestly, does he really believe that? If the advisor has an embedded fee option, it sort of avoids having to have that conversation about the benefits of fee-based compensation. Clients have been programmed for so long to not having to look at certain fees that it really is a challenge for advisors getting them to see the benefits.
Will the other ETF firms follow suit? I hope not. Barclays iShares has done something more in line with the Onus ideology and that's simply to educate. Their recent ad campaign points out problems in the client-broker relationship and the broader retail investment industry, including my favorite: "Canada has the highest MERs in the developed world. Should your clients care?"
All this being said, Seif's reasoning is that ETFs are great products, and if clients are being steered away from them because of a lack of trailer fees, then something should be done about it. It must be mentioned that I, admittedly, have a genuine respect for Som Seif. A respect that extends outside the retail investment industry. Seif accomplished the feat of setting up Claymore Investments all the while coaching the U of T water polo team to a championship season (his third one in fours years). He admitted doing it at the expense of having to cut some of the team's more promising players because he didn't want to jeopardize the team chemistry. A risk-taker. A great coach. A genuine leader in my books.
However, in this case, I feel he's leading the wrong way.
posted by Zahid Jafry @ 9:06 PM
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