UK platforms’ staunch resistance to ETFs has done little to stifle the dramatic rise in demand across Europe, however, it remains the biggest barrier to adoption.
The established shift from mutual funds to ETFs was cemented in 2023 after the latter enjoyed €180bn more inflows in the first 11 months of the year, according to data from Refinitiv.
In fact, ETFs saw €119.7bn inflows while mutual funds suffered €61.1bn outflows, driving the wrapper’s assets under management (AUM) in Europe to over $1.6trn.
Despite this clear trend, the story could not be more different in the UK wholesale market. According to Morningstar, ETFs’ share of managed portfolio service (MPS) offerings dropped from 15.4% in 2022 to 12% last year.
The stark contrast is a direct impact of cumbersome platforms that – in many cases – do not offer fractional trading or the full suite of ETFs for MPSs to access.
Without fractional dealing, wealth managers cannot rebalance MPSs efficiently as they are forced to buy and sell the full units of ETFs, an issue when small changes are required across multiple platforms.
Because wealth managers want to list across as many platforms as possible to capture adviser assets, this encourages them to favour mutual funds – active or passive – in their MPS solutions.
Mike Morrow, chief commercial officer at Parmenion, which has £9bn AUM on its UK platform, blamed fractional dealing regulation and high unit prices as the main reasons for the lack of ETF adoption.
In particular, he said the government’s long-time ban on fractional trading in ISAs meant it has been easier for discretionary fund managers (DFMs) to use mutual funds.
However, Ryan Hughes, investments director at AJ Bell, which includes a significant number of ETFs across its MPS and on its platform, said it was simply down to platforms “dragging their heels”.
“It is a technology issue,” Hughes told ETF Stream. “We have watched with frustrated eyes as other parts of the industry have been too slow on this issue.
“We run our MPS across other platforms but are limited in which platforms we use [because of our ETF usage]. The growth of ETFs has been exponential which is why it is a frustration.”
A solution?
According to Heather Hopkins, founder and managing director at NextWealth, DFMs are solving this issue by using their own unitised funds within their MPSs.
This allows them to create a fund that holds ETFs, securities and investment trusts, providing access to all the products they want.
“One of the challenges for DFMs in managing model portfolios on platform is the ability to access specific investment opportunities,” Hopkins explained. “For example, rather than buying a Mexico ETF, the DFM will need to buy a Latin America Index fund. This limits the opportunity to execute on best ideas.
“[With their own unitised fund], they can have a consistent proposition across platforms without the need for compromise.”
Elsewhere, the government’s move to “permit certain fractional shares contracts as eligible ISA investments” in last year’s Autumn Statement is another promising development.
While mainly targeted at retail investors, this removes another reason why platforms are not willing to enable ETFs to be traded as efficiently as possible.
Final word
From a business perspective, platforms should recognise the direction of travel and the risk of propping up an industry that haemorrhages assets on an annual basis.
ETFs are the future of the asset management industry as highlighted by the numerous new players in the market in 2023 alone. Platforms should wake up to the demand.
