By Guillermo Trias.
For all it takes to get an ETF off the ground—designing, de-veloping, launching, targeting and positioning it appropriately—those key measures are just the very first steps in a long and arduous path to success as an ETF issuer. The real challenge for issuers begins a few days after the launch: the moment of truth, when effective education and com-munication of the “why, how, what, where, and how much” becomes ab-solutely critical.
Over the last few years, this moment of truth has become more challenging than ever. Three significant barriers have emerged as the biggest challeng-es for issuers to successfully distribute their new ETFs and gather Assets Un-der Management (AUM):
First, new issuers and new launches are currently being confronted with a high level of skepticism surround-ing ETF launches that is difficult to overcome. Many advisors and sophis-ticated investors tend to believe that any new ETF is either a gimmick or a marketing game, even before examin-ing the investment thesis or confront-ing empirical data behind the new launch. Several initiatives can help with this initial skepticism right after an ETF launch and during the first months/years of an ETF’s existence:
- Scheduling good one-to-one ed-ucational conversations between the brains behind the ETF and advisors to discuss the invest-ment thesis of the ETF and not the product itself.
- Supporting the sales process with research pieces, white papers and videos explaining the investment thesis.
- Sharing weekly or monthly blasts with the client/prospect base elaborating on the investment thesis and employing innovative selling/educational points.
- Inviting prospects to educational webinars.
- Securing the endorsement of prominent figures of the invest-ment management world or the specific ETF’s investment area or asset class.
- Using social media innovative-ly to generate trust and support your product.
Second, a large majority of financial advisors will not have access to new ETFs during the first months (possibly first years) of existence. Gates are higher and stricter than ever for new ETF issuers and new ETFs to be approved at the major broker plat-forms. In general, new ETFs are not immediately available at the main wirehouses and independent broker dealers’ (I B/Ds) platforms. Approval will require significant efforts and ed-ucation from the issuer. More specifi-cally, to be considered for approval at the big 4 wires and some of the larger I B/Ds, new ETFs will be required to have:
- Some minimum level of assets under management (min. Aum between 10 to 100 million de-pending on the platform and type of etf).
- Some minimum daily liquidity (average daily volume between 10,000 shares a day to several hundred thousand depending on the platform).
- Tight spreads (less than 25bps on average).
- Last but not least, new ETFs will have to generate advisors’ interest for these platforms to consider the ETF for approval. It is special-ly challenging to generate interest among advisors when neither the new issuer nor the new ETF are approved.
The real challenge for issuers begins a few days after the launch: the moment of truth, when effective education and communication of the “why, how, what, where, and how much” becomes absolutely critical.
Even when the minimums and condi-tions above are met, approval at these platforms is not guaranteed. In some cases, the ETF might meet the min-imums but cannot be approved be-cause the ETF issuer behind the ETF is not approved yet due to its track record or current AUM (some of the platforms will require for an ETF issu-er to have at least 500 million in assets to be approved).
This limitation in the availability of the new ETFs at the major platforms poses a massive challenge for new is-suers who see their target universe of advisors reduced significantly (main-ly to the RIA channel).
Third, advisors are facing increased pressure across their various areas of business, including shifting demographics and client demands, increasing competition in their busi-ness, fee compression and increased regulatory scrutiny (i.e. DOL). Their business is becoming more complex than ever and they are required to wear many hats to successfully man-age diverse aspects of their business. As a result, more and more advisors are limiting the time they spend with ETF issuers and their sales forces due to the overwhelming amount of calls, emails, and meeting requests they re-ceive from issuers and wholesalers. Success selling new ETFs will require new issuers to use their best people, practices, and resources to convince advisors to secure good conversations with them. Moreover, new issuers will have to develop innovative ways of communicating with advisors and make sure that they bring a unique value proposition and clear solutions to their table.
Source: Big Tips Publication