ETF Strategy Growth a Boon for Advisors

Andrew Gogerty: Assets continue to flood into ETF managed portfolios. Hi. I am Andrew Gogerty, ETF managed portfolio strategist at Morningstar. Today, joining me for a short conversation on trends in this space is Peter Quinn, president of the RiverFront Investment Group.

Peter, thanks for joining me today.

Peter Quinn: Thanks for having me, Andy.

Gogerty: So, we recently put out our updated Landscape Report, and there were some staggering numbers: 30% growth this year in this space, 48% in the last nine months. As one of the firms that's directly in front of financial advisors, what type of strategies or combination of attributes are most in demand right now that you're seeing?

Quinn: Well, it's been great growth in the space. I think any time you have something like ETFs that are growing so quickly, having people like RiverFront, some of the other strategists in the marketplace, putting them together in a package that makes sense is something I think that we'll see obviously continued growth in. And the fact that you're now following at Morningstar I think is great for all us as ETF strategists. I really think we're seeing demand for a combination of strategies. So, there is a wide dispersion between different types of ETF strategists.

Gogerty: Absolutely.

Quinn: At the essence we are really a core manager where we're trying to build a comprehensive core, multiple asset classes that are risk-based models out in the marketplace. And we're obviously seeing a lot of demand for that. We've been a beneficiary of that growth. But there are some ETF strategists that are seeing great demand coming in that are doing more satellite strategies, where there are doing more aggressive tactical bets. They are using quantitative models to structure those portfolios.

And so I think one of the nice things about the industry and its growth is that you now have choices in the ETF strategy space about how to best execute what you're trying to do for your client.

Gogerty: So, even though your portfolio is really a solution in that you're holding multiple ETFs, financial advisors are still looking at you as kind of a strategy, and they still want to diversify strategies within a client portfolio even though each strategy may have multiple positions?

Quinn: Absolutely. I mean we're big believers that solutions for clients are about partnerships; they are not about product. And while we provide what we think is a terrific comprehensive core solution for people where we are using these multiple asset classes and tactically adjusting those, there are other strategies that complement RiverFront very well, whether it's another ETF strategist, whether it's an active mutual fund, whether it's another separate account manager, or an individual ETF, that can really complement what we're doing, and we're seeing more and more of that in the marketplace.

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Gogerty: You talked about partnership obviously with other strategists, but that relationship with that financial advisor you're serving is obviously crucially important, and I'm sure there are a lot of discussions in properly setting expectations for a number of things. Where is the concept of another 2008-type downturn playing into those conversations? Obviously, in '09, it would be the first thing, but as we get further away from that type of calamity or maybe once-in-a-generation market environment, where is that still in financial advisors' minds?

Quinn: Well, I think it's really pretty still high in the consciousness, not only of financial advisors but of their clients. RiverFront is a little unique in that we only work with financial advisors. So, you can't come to RiverFront directly as an investor. You have to come through a financial advisor because what a financial advisor does dealing with the totality of a client's financial life is different than what we do running global tactical ETF portfolios.

I think it's really important and what's happening you're seeing is that 2008 experience continues to be very much in the forefront of people's minds and their fears. And the financial advisor's ability to go to the client with a manager that has a disciplined risk management process and has proven to be able to navigate a market like 2008 and then participate in a market like 2009, is really continuing to be critical.

I think one of the reasons why tactical managers have gained so much traction over the last couple of years is the idea that you don't have to just sit there, that you can actually do something from a risk management standpoint to protect on the downside, which is so critical.

Gogerty: As this space continues to grow--I mean this isn't $1 billion or $2 billion, we're talking $50 billion through the middle of the year--we're seeing these strategies get on more and more advisor platforms and preferred or select lists. How do you think that that trend may change the way that strategies in general are distributed as we move forward?

Quinn: Well, it's becoming mainstream on all the different platforms and channels that are out there in the marketplace, and there is a lot of work going on to find out who the appropriate strategists are to put on the various platforms. And where at one time it may have been relegated to some of the smaller areas in the distribution standpoint, it is becoming more mainstream, not just with the independent IBDs of the IRA space, but you're seeing it come all through the regional firms and many of the wirehouses now are really embracing the concept of ETF strategists as one of the core distribution partners that they have to provide solutions for their advisors and clients.

So, I think you're really going to see the opportunity for strategists to be more mainstream and be focused on multiple distribution points. It's going to continue to grow and be an opportunity for us all.

Gogerty: It seems like they can be multiple points in building a portfolio too as you mentioned. Whereas before they may have been looked at as the satellite or the alpha generator, now, there are firms that provide their core exposure that a financial advisor can really build a client portfolio around.

Quinn: Yes. That's right. I mean advisors really are looking for ways to try to serve the totality of the need of their client portfolios and what their client's need. It's very much outcome-based as we go forward as opposed to simply alpha-based, "Am I over or under a 100 basis points of the specific index." So, when you really talk about trying to provide outcome-based solutions for clients, it really means that people who are doing various things coming together in a package can be pretty compelling for an advisor.

Gogerty: Great. Thank you for your perspective today and your time. I appreciate it. This has been Andrew Gogerty, ETF managed portfolio strategist with Peter Quinn from the RiverFront Investment Group. For more information on ETF Managed Portfolios, please visit Morningstaradivisor.com. Thank you.