The democratization of financial products

As portfolio manager, a member of the Canadian Exchange Traded Fund Association (CETFA) and a frequent commentator on ETFs, most assume that the majority of my client’s money is in ETFs. They couldn’t be more wrong.

ETFs make up less than one quarter of my total assets under management. My clients have a comparable amount invested in structured products and (gasp!) a little over half of their portfolios are in mutual funds.

Many people (and this includes some financial advisors) think of their options in spaghetti western terms: ETFs wear white hats; mutual funds wear black ones. But viewing the two in simple good vs. bad terms is an oversimplification of the decision. There are number other attributes that need to be considered before selecting the best route such as cost, diversification, turnover, purity, transparency and advisor compensation.

As fate would have it, most ETFs top most mutual funds when applying these criteria, but there are exceptions.

Evidence-based funds

For more than 13 years now, my largest product mutual fund provider has been Dimensional Fund Advisors (DFA—or sometimes simply ‘Dimensional’). Dimensional is a mutual fund company based in Austin, Texas that has 35-years of experience constructing products using evidence-based risk factors like market capitalization and value. The are pioneers in this area and I feel they are the best products on the market. I’m fiercely proud of my association with them.

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Until now, Canadians have only had access to DFA by working with one of DFA’s pre-screened advisors (there are still only about 160 of those in the entire country). Their logic is simple: they want advisors who will help clients focus on their long term interests rather than near term gratification, who may dump the fund if things get rocky. But in April, Manulife Investments launched a series of multifactor ETFs in partnership with Dimensional as sub-advisor. Manulife is expanding their product line into ETFs, which the company says “have become an essential component of investors’ portfolios.”

This means anyone can now access DFA’s products and methodologies, including people who don’t work with a DFA-vetted advisor or perhaps don’t work with an advisor at all. The launch of these products comes at a interesting time, given the debate about the value of advice has been focused on the notion of advisor’s alpha, sometimes called gamma. By making these products available to individual investors, we’ll get to gauge the value of having a qualified advisor.

Democratization of products

On one hand, I’m delighted that the DFA methodology is being democratized and popularized across the country. (It should be noted that while the DFA’s mutual funds and ETFs will rely on similar screening factors, they will be different under the hood.) On the other, we’re about to witness a grand and important experiment about the role of qualified advice—and I fear that the ultimate lesson of foregone advice will be startling.

I love that Dimensional has always been proudly different. No other firm in the country forces advisors to demonstrate considerable product knowledge as a necessary pre-condition of being able to represent their products. Until now, Dimensional has always been a massive proponent of advice and the important role of good advisors. In fact, Dimensional’s commitment to advice stands in stark contrast to many other providers. For instance, I know of one company that used to run a national ad campaign that said “invest with advice” even as it continued to sell its products through the no-advice discount brokerage channel.

My dilemma

My dilemma: As an advisor, how should I react to the new ETFs from Manulife that are sub-advised by DFA?  Time will tell on how this will play out. In five (or more likely 10 or 20) years, we’ll be better able to assess the overall impact of world-class, evidence-based products combined with qualified (and specifically trained) advice as compared to simple access to the same methodology without specialized advice.

It’s not obvious which of those two variables is more important—best in breed products or the perspective and wisdom that comes with knowing how to use those products.

John J. De Goey CFP, CIM, FELLOW OF FPSC is a Portfolio Manager with Industrial Alliance Securities (iAS) and the author of The Professional Financial Advisor IV. The views expressed are not necessarily shared by iAS.