When it comes to knowing how exchange-traded funds work, ETF sponsors report that financial advisors have the hardest time understanding liquidity and trading, according to research released in July by Cerulli Associates.
A total of 63% of ETF sponsors rated liquidity as their top growth challenge in 2013 because of advisors' limited knowledge of the topic, Cerulli reported. Understanding how ETFs trade got the second-lowest ranking, and how ETFs are structured was third lowest. Meanwhile, ETF risks and the use of ETFs in portfolio construction ranked as the top two topics that advisors understand best, followed by tax treatment.
"Liquidity and trading ranked the lowest, suggesting these two topics should remain top of mind for providers when developing educational programs," said Cerulli Associate Director Alec Papazian in a statement.
The Boston-based global analytics firm concluded In the July 2013 issue of "The Cerulli Edge-U.S. Asset Management Edition" that ETF sponsors should do more to educate advisors in order to further increase advisor adoption of exchange traded products.
"As the market matures and ETF investing spreads beyond its foundation of core domestic equity indices to categories such as fixed income, international equity, and products including alternative weightings (i.e., volatility weighting, equal weighting), sponsors are finding the need to create educational materials and programs for both new and advanced users of the products," according to the report.
Sponsors disagreed on the single largest inhibitor to ETF adoption, splitting evenly between insufficient platform support, inadequate knowledge of ETF use in portfolio construction and reluctance to reallocate existing client positions to ETFs.
Cerulli's research found that the percentage of advisors using ETFs by channel broke down as follows in 2012:
- Wirehouse, 63%
- Registered investment advisor (RIA), 55%
- Bank, 44%
- Dually registered, 42%
- Regional, 42%
- Independent broker-dealer (IBD), 39%
- Insurance, 24%
Creating programs to meet the educational needs of these advisors across the spectrum of adoption and sophistication "is a difficult task, but it will be necessary for some time," Papazian predicted.
