What ETF Providers Can Learn from Robos
The one segment of financial services where you won't hear much concern about the advent of robo advisors are ETF providers.
The small but growing array of digital advice platforms rely on low-cost ETFs to fuel their automated asset allocation portfolios.
The growing popularity of ETFs and the rise of robo advisors in the same period is not a coincidence to many industry observers, and Dan Draper, managing director of global ETFs at Invesco PowerShares, acknowledges there is a synergy between the two.
Robos are often described as a tool to make financial advisors better and more efficient in their practice. But Draper explains that product providers can take strategic lessons from robo platforms too.
What's your perspective on the disruption that digital advice has introduced into the financial advice and product space?
The robo advisor space is still relatively small. We'll all agree on that.
But think about an ETF; it does provide content but also it's a distribution pipe.
The ETF is a digital experience. Contrasted with mutual funds, which I would say are a 20th century invention for the most part; I almost refer to mutual funds as analog technology.
If you really examine the ETF, because they're taking the daily priced, 20th century mechanism and using technology to take that and list on the stock exchange to provide intraday pricing, for me that's like you're taking an analog technology and converting it to digital.
Robo advisor platforms have a very strong Silicon Valley touch and feel to them. So it just seems that for developers of robo software and technology a digital instrument like an ETF is a natural tool to utilize.
Conceptually, they're probably thinking about how this makes a lot of sense if you're focusing particularly on millennials -- that experience where I can go onto my iPad and I have the control to buy an ETF and also have that experience to see that I'm executing on it almost instantaneously rather than waiting another day.
The whole customer experience really ties to the whole experience that the robo advisor is trying to provide. So I think there does seem to be an actual marriage between the two.
The other thing is obviously the cost of ETFs have continued to get cheaper and cheaper. Now the millennial investor can move into a group of index fund or other type of mutual fund offering that they could look at, but the ETF is competitively priced. And these investors also like that ETFs are offering a high level of transparency.
Considering all those characteristics that you know about ETFs, I think it just seems so natural. One form of emerging technology is combining with another form of emerging technology.
How do you see that synergy then changing the market? And does that development then change the ETF offering at some point?
Again, robos are a very small segment at the moment, but aside from their business model, I think what's so interesting is their technology and the application of that customer experience.
As almost all ETF providers, we are a business-to-business model. We work with other intermediaries who then touch the clients.
But we are regarded as a B-to-C player due to the way a customer experiences our product. They are able to get in with fewer clicks, have a more graphic interface and have more ways to get a lot of information.
So when I'm looking at a robo, what really interests me is that even though we are a B-to-B, I want to take some of that technology and have that feel, that customer experience and really integrate that in our B-to-B model.
Is there anything else ETF providers can gain from studying robos?
They're starting to inform us with this really strong digital footprint they've established, and through data they are giving us a lot of information about being consumers, which helps educate us on serving our B-to-B clients.
If my B-to-B client is thinking about this space and dealing with this opportunity, then I need to be prepared to give them the best experience possible. If they're going to use me as a product manufacturer, then effectively, we want them to have a great experience.
It's almost like 'Intel Inside.' Back in the 1990s you didn't go to a store to buy an Intel chip, you bought a computer. But it was really important for Intel to brand and make people feel, 'Hey, I'm going to buy an HP or a Dell or an IBM computer [with an Intel processor] because that gives me the extra feeling of credibility; the quality of that chip and that processing experience is something I have.'
So before it was a small consideration when you bought a computer, but they made it a big one.
That strategy really helps with your relationship, if you're a manufacturer or if you're more B-to-C facing with an intermediary client. I think some of that's already happening.
Using your analogy, ETFs might help differentiate a robo the way Intel chips helped brand computers?
We're producing and making investment micro processing chips. Again, what initially was done from a Wall Street experience -- product development and distribution -- and bringing Silicon Valley into it has us really thinking about what we do, certainly from a millennial perspective, but also from even a broader perspective, about the customer experience that clients want to have.
You're comfortable then with the industry changes prompted by robos?
You look at an existing technology and all of a sudden there's a better version. That's the beauty of smart beta; you can make some changes to the products. So when you had a Pentium 286, Intel comes out with a 386 and then a 486.
I think this is really for us to take in, because we really are a smart beta player at PowerShares, to think about our product development where we're coming out with improved versions, better processing power, which the equivalent in investing is diversification.
What is the free lunch that as an investor that I can get? That comes with better forms of providing better risk return experience and diversification.
I really look at what robos are providing from the customer experience and thinking about the branding, the look, the touch, the feel of those platforms. If we can bring that, even into our manufacturing, it would be really powerful and hopefully make us a much more valuable partner for the wirehouses, for the financial planners and to the institutions to want to use our building block products.
Also it helps us get valuable digital information because they are so tech savvy that the sample base that they can get, what was good about our product: was it a cost factor, do they want more income, do they want enhanced return, do they want more volatility; all these kinds of factors just by having that digital footprint.
The robo sample is small now, but if it gets bigger, they're going to be important constituents and provide manufacturers with better information.
Were you surprised to learn about BlackRock's acquisition of a robo?
Robos are an interesting space and the decision to buy or partner, all those are options for people to look at. I'm sure BlackRock had its reasons.
For us our core competency is building great products and then really helping not only robo advisors, but RIAs and wirehouses and financial planners really use them effectively. It's important that they grow and continue to be successful.
What we're trying to do specifically with robos is more of an education piece, that arguably in a low interest rate environment people are more fee conscious. We're trying to prepare people that at some point when rates normalize, and also with increased volatility that we've seen, there is opportunity for outperformance or tactical asset allocation or other types of asset allocation. They can actually improve Sharpe ratios and provide a better experience. We think that their model will evolve, from offering only very low cost with traditional benchmarks, but providing value through enhanced asset allocation by using smart beta.
As digital advice grows, will it be as important one day to make sure your ETFs are within a basket being offered by a robo advisor as it is right now to have an ETF on a platform of a major wirehouse?
We're a B-to-B business, and robos can be another channel, just as we look at wirehouses and RIAs.
They're very different in terms of what they want. So far it has been a cost argument and now we're trying to expand their appreciation of performance as well -- risk-adjusted performance -- through smart beta. So, absolutely. Could they become a more prominent channel? That's a possibility.
That would certainly be a testament to the rapid change brought on by technological adoption.
On the one hand, the nuance of what they need and what their clients want, it's like any channel. You need to engage with them, understand what's important and obviously as a manufacturer deliver to what they're trying to accomplish for their clients. On the other hand, we have very defined channel strategies for institutional clients and even with RIAs.
If the robo space gets big enough and the growth opportunities were there to give resources on a channel basis to them, we will give it a lot of focus.
We think they're clearly worthy and that's why we're actively engaging. And they're clients. They own some of our ETFs, and we absolutely try to make sure we're working with them to support them.
It's fascinating when you think of the whole value chain from what we do in manufacturing to the end customer experience. I think there are just a lot of things that they're doing. And from the technology perspective, it's not necessarily just the B-to-C piece, but I think throughout the whole value chain, we can take elements of that whole technology experience and really bring it throughout that value chain and have a real impact.
That's more of a holistic approach rather than just that whole robo advisor -- that's a basic question but for me it's much more subtle. I think there is much more property value created and where the whole value chain gets leveraged, I think that has a lot of possibility.