Do Advisors Need To Be Told To Use ETFs?

Last Updated: 22 February 2024

Meanwhile the UK regulator, the Financial Services Authority (FSA), has been taking a prescriptive view, spelling out in its Retail Distribution Review (RDR) consultation paper that “[ETFs] should be considered when deciding which products are suitable for a retail client”.

I can see where the FSA is coming from. But is it the job of a government regulator to tell private companies what they should and should not be advising on?

If IFAs want to carry on recommending only actively managed funds, hedge funds, insurance bonds, structured products or whatever else they believe is good for their clients, shouldn’t they be free to do so?

Those IFAs who do want to use ETFs are quite free to make clear to their clients what they perceive to be the inefficiencies of competing advisors’ product choices – whether it’s overall cost, commission bias, or the inability of most active managers to outperform – and many are already selling their services on this basis.

The investor client will then have to make his or her own mind up about which approach he prefers.

I’m as big a fan of ETFs as anyone else, but I feel that asset allocation by diktat is not the way things should work. And, however well-meaning, the FSA’s approach may not be in the best interests of end-investors.

Passive isn’t always better than active and, as we’ve seen during the last year with the controversy over leveraged ETFs and commodity trackers, not everything that is labelled ETF is good for you as a long-term investment.

The world of money is full of pitfalls and if you can avoid being taken in by investment products that seem too good to be true, you’re doing pretty well in my opinion. Caveat emptor is always a good starting principle.

Investment by government regulation is almost certain to be a poor substitute for this approach and, worse than that, the state seal of approval is likely to give false assurances to investors that things are in their interest. Since this encourages people to switch off their natural scepticism, the chances of things going awry actually increase.

As an example, just look at how the credit ratings system (which I wrote about in my blog yesterday) became perverted as a result of the US government’s decision to authorise only those ratings given by “NRSROs” (nationally recognised statistical ratings organisations) for regulatory purposes. This structure, put in place in 1975, created an effective cartel and, combined with the “issuer pays” model for credit ratings, has resulted in an industry shot through with conflicts of interest.

So, regulators, please ensure a level playing field for all investment product providers, pursue transparency and act on anticompetitive behaviour – but stay away from recommending ETFs!

Author
  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.

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