Given the explosive growth in exchange traded funds with their vast investment offerings, low cost and tax-efficiency, chances are your financial advisor has at least considered using them in part or all of your portfolio.
But what if he or she doesn’t? It might be time to ask them why not. And if the answer is unsatisfactory, look for one that does.
ETFs might not be right for every part of your portfolio, but they could be a good fit in various areas.
For example, does your investment plan call for some exposure to the broad stock market? There are many ETFs that track the S&P 500 and broader indexes offered by the big ETF providers, BlackRock’s iShares, State Street Global Advisors’ SPDRs and Vanguard. If your advisor chooses a more expensive way to gain exposure to the stock market, there might be a reason, but there should be an explanation.
If you’re unsatisfied with the answer or are just beginning your search for an advisor, where do you start?
You can ask friends and family for referrals. You should also check out the National Association of Personal Financial Advisors, or NAPFA. It’s a professional association of fee-only financial advisors that started in 1983. They have a registry of advisors and chances are there are several near you.
If you have at least $500,000 to invest, you can also try Schwab Advisor Network. Other brokerages can also help refer you to financial advisors.
But if you start your conversation with an advisor by asking if he or she invests in ETFs, be prepared to get a question or two thrown back at you before you get an full answer. That’s because advisors are trained to look at your investment goals and risk tolerance before choosing investments that fit your needs.
Nik Schuurmans, the founder of Pure Portfolios, a registered investment advisor (RIA) in Portland, Ore., says to get an ETF-focused advisor you need to go with an independent RIA who doesn’t have a relationship with a mutual fund family, so he or she doesn’t have to push mutual funds. He says if you’re willing to embrace technology you can also try a robo-advisor. NerdWallet’s top 2017 robo-advisor picks include Betterment, Wealthfront, Wealthsimple, WiseBanyan, Charles Schwab and Fidelity Go.
“I don’t believe a consumer should use ETFs vs. other products as the criteria for using advisors,” said Matthew S. Clement, president of Emerald Retirement Planning Group in Stony Point, N.Y., an RIA that uses ETFs in its client portfolios. “I don’t mean it shouldn’t be part of the conversation. But it would be misguided to be the main reason. And it misses the fundamental issues for some hiring an advisor in the first place.”
Clement said the fundamental question when choosing one advisor over another is: “What do I expect this advisor to do for me?”
“There’s no book with the title ‘Advisors That Use Only ETFs,’ ” said Steve Dunn, executive director of ETF Securities, a specialist commodity exchange traded product provider. “But, it’s becoming much more common to find them. You have to find an advisor with a consistent philosophy of what you expect.”
Dunn suggests a group of advisors called the Zero Alpha Group, or ZAG.
“Their website lists firms that buy into this passive low-cost alternative.”
But the best known resource is a site called the Paladin Research & Registry. Started in 2003, the site is run by founder Jack Waymire, the author of “Who’s Watching Your Money?: The 17 Paladin Principles for Selecting a Financial Advisor.”
Advisors pay a membership fee to join the registry, which then vets them before they are listed in the registry.
Paladin reviews and documents financial advisors’ credentials, education, experience, ethics, business practices, services, certifications, associations and continuing education.
“Most advisors present themselves in the form of sales pitches,” said Waymire. “We require transparency. If an advisor is telling people he’s an expert, where did that expertise come from?”
It looks at advisors’ fiduciary status, license, registration and compliance record at finra.org.
The registry lists what services advisors provide, how they are compensated, and how they communicate with clients. And for our person looking for an ETF-focused advisor, it lists a manager’s strategy, whether passive or active.
“Passive and ETFs are virtually synonymous,” said Waymire.
After checking the data, it rates the advisor’s quality. An advisor needs to achieve a specific score to get into the registry.
Waymire said investors could query Paladin for another level of detail such as “I’m looking for an advisor that uses passive management with ETFs.” He said if they want to do research that goes one level deeper they need to go the advisor’s website. He also recommends that investors check out the advisor on finra’s brokercheck.
This was originally published in Investor’s Business Daily.
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