By David Stevenson –
Acronyms, don’t we luv’em! In fact, I’d argue that the sector’s enthusiasm for those bloody acronyms has actually tipped over into hubris as it tries to explain why the term ETP (which stands for exchange-traded product) is the best catch-all descriptor as opposed to index trackers, ETFs, ETCs, ETNs or any other combination involving the letters E.T. The problem is that very few people in the wider world of normal sentient human beings actually care!
A superabundance of acronyms is proving counterproductive to the industry, reckons David Stevenson.
Worse still, they find the whole debate completely confusing and counterproductive. I’ve had countless conversations with IFAs, for instance, who have thought long and hard about using index tracking funds but have given up because they can’t quite understand what the difference is between all these different structures. God alone knows what these guys will think when active ETPs start pushing into the mainstream… “Now David, about those passive index tracking funds you are so enthusiastic about, how come some are active?”…!
Now we can of course shrug off this sniping from the sidelines and simply point to the numbers, which suggest positively that assets under management (AUM) for passive funds of all shapes and sizes is growing at a phenomenal rate. And yep, that is good news, but I’d argue that all that’s simply happening is that institutions (who presumably know their Ps from their Cs and Fs) are playing catch up. And whilst I wouldn’t deny that take up from retail is growing fast, again it’s from an incredibly low base and largely being led by adventurous, sophisticated investors who long ago learnt to ignore the complex terminology offered up by financial innovators.
The debate about acronyms matters hugely because if the industry is to push through into the mainstream – one dominated here in the UK by paid-up members of the IMA – and convert the rest of the population it needs to win over certain gatekeepers. For IFA networks, the compliance teams and investment panels need to be confident in understanding all the differences between structures and strategies. In my humble opinion, having talked to lots of them, they don’t – in fact they were only just getting used to ETFs before all this ETP stuff came long.
Out in the brutish world of mass-market consumer it’s also interesting that fairly innovative outfits like Nutmeg play down all mention of acronyms, focusing instead on ideas around low cost and simplicity (all good themes). This is echoed in Alan Miller of SCM‘s various campaigns – notably his new ‘True and Fair’ campaign over at http://www.trueandfaircalculator.com/.
In my opinion, consumers just don’t care about acronyms and complex titles foisted on businesses by interfering regulators. They care about two things and two things only. First, can they TRUST the brand offering the product, which presumably explains why BlackRock has pushed its iShares branding so aggressively. And second, they care about outcomes – will this investment help me make money over the long term? Cost is a sub component of that second theme but actually only a small (but nevertheless important) part of it.
Last week I spent some time with an IFA marketer who reckons that the whole ETP/ETF/passive industry is heading in entirely the wrong direction. He spends an inordinate amount of time trying to convince hard-up consumers to part with their money for the long term. His most successful funds? Products like the Standard Life GARS fund range, one of the most staggeringly successful funds ever launched in the UK. The secret of their success? According to my marketer, “they say Standard Life, …umm…that’s a big name I trust with my money, who I think will stand behind their fund if it ever went tits up. And the idea of an absolute return, a positive outcome in all markets. I like that as well, so put my money in it”. Or, as my marketer puts it even more harshly, “its a bloody hard world out there trying to sell any investment to anyone, but you’ve got to start with name recognition and then move on to hope!”.
Yet I would argue that even before passive/ETP providers can start to think in a new way, emulating the very best houses that dominate the IMA – look not just at Standard Life but also Artemis, Neptune and M&G, all superbly managed outfits – they first need to sort out a few big issues.
The major problem is the acronym jumble. It’s a mess and it’s only going to get worse as the speed of innovation picks up. Somehow the industry needs to think about changing the language from structure to outcome.
But to do that we then need to look in detail at two of the words I’ve just used, industry and structure. The industry as such doesn’t exist. It cannot find a common voice because it spends its entire time battling itself. The whole debate over the last few years about synthetic vs physical was a classic example of what marketers (and Prince Philip) might call “shooting oneself in the foot”. There is an entirely legitimate discussion to be had about the merits of either but frankly the net effect of this episode was that lots and lots of investors decided that they didn’t like what they saw and thus avoided ETPs. The core issue? There’s no industry voice, especially here in Europe.
That word structure is also hugely important. The industry at the moment is dominated by people who’ve probably started in either a structuring role or gone on to sales. Structurers also genuflect to overzealous regulators who insist on calling every kettle black unless of course it’s green. But then again everyone in financial services is bossed around by overzealous regulators so perhaps that’s no excuse! The key, though, is that the leadership of the industry now needs to move towards people who really understand and comprehend distribution, brand and marketing. They need to think in a very different way about building sustainable brand businesses. And we need to think long and hard about starting with all those wretched acronyms!