Many of my clients and readers understand my general preference for exchange-traded funds (ETFs) over mutual funds.* It isn’t that I doubt the ability of any active mutual fund managers to outperform their benchmarks—plenty of them do. It’s just that if I have to pick an overall methodology to follow in my practice, I’d rather stick to the low-cost, transparent nature of ETF investing over buying actively-managed mutual funds. Back when I wrote my book in mid-2007, ETFs were graduating quickly from speculative tools to core holdings, a trend that really started in 2005. Nowadays, we can see in the constant release of fund flow data by companies like TrimTabs and Barclays that ETF investing is growing at a rapid pace while mutual fund outflows have been consistently heavy. Part of that is obviously due to investors sidelined by the recession, but the other part is the financial advisor channel quickly catching onto the benefits of ETF investing.
There was a great article in last month’s Financial Advisor magazine which compares RIAs and IARs. To anybody reading this article not in the financial services industry those anagrams probably mean almost nothing. However, they represent important operational choices which an advisor must make when venturing out of the wirehouse channel and into smaller, independent firms. RIA stands for Registered Investment Advisor. This is generally considered to be the most free and flexible business structure which an advisor can choose to reduce his/her exposure to onerous regulatory oversight and obtain more freedom in terms of clearing firm options, investment products and payout percentage. The choice to become an IAR (Investment Advisor Representative) may be viewed as somewhere in between total freedom and partial oversight. The difference is that IARs can rely on the back-office support offered by broker/dealers. As the article in Financial Advisor concludes, plenty of advisors are moving into the broker/dealer channel rather than opening up their own RIA, the result of a tighter compliance environment and a slumping economy.