Aided by big companies like State Street and BlackRock, managers offer a leg up to RIAs seeking ETF strategies

April 6, 2011 — 2:44 PM UTC by Lisa Shidler


The sale for a hefty premium last year of Boston-based Windhaven to the Charles Schwab Corp. is drawing attention to a whole need breed of RIAs: ETF-savvy money managers who offer their services to advisors who don’t want to do the legwork themselves.

Windhaven, which sold for $150 million in cash and stock, is one example of the fast-emerging subset of money managers. Since the sale, the company has grown from $4 billion to $5 billion in assets, growth attributed to more advisors seeking its ETF-only strategy.

See: Schwab’s purchase of Windhaven made its asset growth soar — and RIA assets may be the afterburners.

Several other firms, including RiverFront Investment Group of Richmond, Va., Avatar Associates of New York and Sage Advisory Services of Austin Texas have emerged as ETF managers.

The key to their growth is that they make it easier for RIAs to offer ETFS to their clients.

For fees ranging slightly above or below 1%, money managers offer what’s essentially an active management strategy for a passive product. Most of these managers have specific models they follow which guides their investment process. Typically, the models are based on recent market and economic data as well as interest rates and inflation.

There is a certain irony in this, of course. ETFs have surged in popularity because of their low-fees and suitability to the passive style. RIAs, however, have proved hesitant to offer ETFs because it means dramatically changing their strategies. See: How ETFs have been oversold when it comes to flexibility, lower costs and tax efficiency and See: Criticism of ETFs is based on fear more than factual basis: columnist.

“To me, the ETF-only manager is unique,” says Anthony Rochte, senior managing director at State Street Global Advisors, an ETF provider who works closely with ETF managers. “They’re building true institutional-powered portfolios. Some of these managers have strong performance records and can take their solution and market it to other RIAs or investors.”

Industry takes notice of ETF managers

Rochte says there’s clearly a large opportunity for these managers and he works closely with them to offer any advice or insight they might need.
“There’s a market for these guys among the advisors who don’t hold themselves out to be a money manager, but look at themselves as gathering assets. That’s where the opportunities are for these guys.”

He believes many ETF managers are using his firm’s solution because it offers 97 different choices. His firm manages $260 billion globally. State Street manages $238 billion in U.S. listed ETFs.

“We help them the ETF managers build sharper portfolios with the tools we provide,” he says. “We understand the RIA market and we have a tight partnership with them.”

Other ETF providers are recognizing the role of ETF managers. For instance, BlackRock, which bought iShares’ ETF franchise from Barclays of London nearly two years ago, is also catering to this new group of money managers.

Recently, Susan Thompson, who is heading the firm’s consolidating marketing efforts for the 401(k), RIA and IBD rep business, shared her plans with RIABiz to work with this new breed of ETF managers. She said the firm is giving special services to help these RIAs with portfolio construction. See: How BlackRock plans to grow iShares using advisors as one key.

Beth Flynn, vice president of ETF platform development at Schwab, has also noticed anecdotally an increase in ETF-only managers.

“I think advisors are realizing that ETFs can be a pretty versatile tool they can use in a number of different ways. We see this happening and it’s an area that I’d like to dig more into to get some numbers.”

Overall, some 84% of advisors were using ETFs as part of their strategies, according to Charles Schwab’s Independent Advisor Outlook Study released on March 7. Advisors cite a number of reasons for investing in ETFs. More than 80 percent say they use them for diversification in client portfolios, and nearly half use ETFs to maintain market exposure while making portfolio adjustments.

For about three years, Jim Weil, an advisor and partner with Financial Strategy Network LLC in Chicago, has used RiverFront as his firm’s ETF manager. He says not all clients invest in ETFS, but his firm prefers to use RiverFront then do it themselves.

His firm manages more than $500 million in assets.

“They’re the experts,” he said. “They understand ETFs. The market to enter and exit ETFs is different from mutual funds and if you don’t understand it, you’re putting your client at a disadvantage.”

He says he uses this strategy for clients who are seeking a more tactical element in their portfolio.

“If you don’t have that skillset or expertise, I’d suggest you’re better off outsourcing it to someone who does it rather than doing something you’re unequipped to do.”

Advisors help drive Windhaven growth

Bryan Olson, a Windhaven vice president, attributes the company’s growth since its acquisition to existing RIAs who have added assets. New advisors also have opened accounts, which has boosted business, he said. See: Schwab closes the Windward Investment Management deal but relinquishes the brand

Windhaven adjusts portfolio weighting several times a year to craft a portfolio that can generate the highest expected return based on a client’s risk factors.

“It’s really about a client solution that we think makes sense,” he said. “It’s a long-term play to offer a solution. It’s not a short-term profitability play. It’s a client solution that we think will be attractive to our clients for many years to come.”

The fees can vary depending on the end user’s assets. For instance, Windhaven portfolios are available to retail clients with a minimum of $100,000 at 95 basis points. RIAs who custody with Schwab can access Windhaven strategies with a minimum of $100,000 and fees are as low as 0.75%. These fees include money manager services and Schwab brokerage and custody services. The RIA’s advisory fee is independent of this fee. See: A look inside Schwab’s big deal with a small asset manager

Windhaven was already on the Schwab platform before the deal, but he says that since the deal there have been more efficiencies. For instance, before advisors had to sign separate agreements with Windhaven. Now, it’s on a single-contract platform advisors sign just one contract for this and other types of investment products.

“There’s more access to advisors who have a tendency to use this kind of product,” he says.

A crowd of ETF Managers

Michael McClary, an ETF manager and chief investment officer for ValMark Advisers Inc. in Akron, Ohio manages about $1 billion in ETFs for the national RIA with offices in 38 states.

He says he’s noticed RIAs making changes to ETFS but it’s been a slow and steady change. “It’s a big change for advisors. It’s very difficult to tell people to pick active managers for 30 years and then to change and use ETFs.”

“I don’t think it’s an area where you’ll see 100 firms be successful,” he says. “You can’t just put up your flag and say you’re an ETF manager.”
He provides strategies for advisors within his broker-dealer — ValMark Securities.

Still, a number of smaller RIAs are also billing themselves as ETF managers.

Sharon Snow, chief executive officer of Metropolitan Capital Strategies in Manassas, Va., has served as ETF manager for her firm’s RIA for the past four years. Her firm manages $93 million.

“(ETF strategies) reduce our time and allows us to be more efficient,” she says.

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