The introduction of fractional trading on platforms is the catalyst for a sharp increase in ETF uptake in model portfolio services (MPS), however, legacy providers remain reluctant to introduce the service.
Fractional trading – a practice that lets investors buy and sell smaller portions of an ETF share – allows wealth managers to rebalance their portfolios efficiently.
It means discretionary fund managers can use ETFs in a model portfolio with the exact weighting and without rounding errors.
However, platforms' fractional dealing capabilities for ETFs are still far from comprehensive. Lack of offering remains one of the biggest barriers to ETF uptake alongside limited ETF access and trading costs.
Henry Cobbe, head of research at Elton Consulting, said the capability would allow investors a much greater choice when building model portfolios.
“There are only a handful of platforms that do fractional trading and where it exists, advisers are agnostic between ETFs and index funds, allowing them to benefit from the great choice of ETFs offer,” he told ETF Stream.
“One frustrating thing is that we are very keen on using factor-based ETFs but there are no index fund versions.”
As a result, ETF investors have increasingly requested asset managers to launch index fund equivalents to navigate the platform issues, something Cobbe has a history of.
“We feedback to the issuers our wish list of exposures we feel are missing ETFs or index funds to try and fill those gaps,” he said.
No incentive for legacy platforms
While some platforms do offer the service, many older platforms struggle to justify the dizzying costs involved with updating their technology to offer fractional trading.
For many platforms, offering increased ETF trading requires a fundamental rewiring of their DNA, having been designed as a fund-switching technology rather than a stock broking platform.
As a result, Cobbe said the industry has “reached a point of inertia”.
“It is a multi-million-pound project and traditional platforms are doing what they are very good at,” he said.
“Platforms say there is insufficient demand from advisers to facilitate trading equities, bonds and ETFs. Advisers that like using traditional fund platforms are happy with what they have.”
Quilter is one such provider that said it would need to see more demand for ETFs before broadening out their offering, adding that fractional trading was on its “propositional calendar” but that given demand “it will have a reasonable challenge getting up the priority list”.
Parmenion, which also offers ETFs on its platform, said it will not offer fractional dealing until the regulation becomes clearer.
Mike Morrow, chief commercial officer at Parmenion, said: “We have chosen not to do fractionals because the regulator says you should not have a fraction of an ETF in an ISA or a pension.
“When the regulator makes it clearer, then we will introduce it, but until that point, we are not going near it. We do trade ETFs and we are happy to absorb the costs of that.”
However, Steve Croucher, commercial officer at Winterflood Business Services – which enables platforms to offer fractional dealing – said this is not the case.
“ETFs are already in scope with fractionalisation of ETFs with ISAs so there is no problem there,” he said.
“The sticking point is around single stocks. When fractionalisation of shares is permitted in ISAs as well, that could be a game changer but it is already available from an ETF point of view.”
However, there is also the view that the ‘lack of demand’ argument does not carry due to the limited availability of ETFs on platforms.
“In a way, it is a slight misstatement,” Cobbe said. “Because if you cannot physically offer something, you cannot say there is no demand for it.
“A more accurate statement would be to say there is insufficient demand from advisers for a business-critical use case to deploy vast amounts of capital to change our technology.
“If advisers can get 95% of what they need with existing technology, then why bother? For a younger generation of platforms that are coming to market, with no legacy systems and costs, they have much more motivation to innovate.”
