Quilter’s head of customer propositions Barry Cook has described the firm’s platform ETF offering as a ‘tick box’ exercise due to the lack of demand on model portfolio services (MPS).
Cook said dealing charges for ETFs was one of the biggest barriers to their uptake and noted the wealth manager incurred “some loss-making trades” when trading the wrapper.
“I would say we have added [ETFs] as a tick box due diligence exercise,” Cook told ETF Stream.
“Some customers want to use them and we have a flexible platform that lets them do this in different ways. We know there is some demand but they are not typically used at scale.”
He added uptake was restricted to “small allocations” with much of the demand coming from financial advisers while discretionary customers are “pretty much not touching them”.
According to Cook, the £100bn wealth manager has around £300m invested in ETFs – roughly 0.3% of its assets – with the firm not particularly bullish about their growth.
The figure is also well below ETFs’ 12% share of model portfolios, according to Morningstar data.
Cook said demand for ETFs on the platform – which offers over 3,000 funds and exchange-traded instruments – would need to grow before it started expanding its offering.
“From our point of view, the demand is likely to be driven by demand from advisers and discretionary rather than us,” he said.
“If there is an adviser who particularly wants a fund and there is a demand case, we will add it. That will be the catalyst for ETFs as they become more used in centralised investment propositions.”
Quilter offers roughly 500 ETFs out of a universe of over 2,500 listed on the London Stock Exchange, a limited offering mirrored among most platforms that means investors must often use multiple platforms if they wish to access the broad array of ETFs in the market.
“If advisers that we were distributing through were getting access to ETFs on competitor platforms that we did not have, it would clearly be a catalyst, but at the moment, it is not causing a competitive disadvantage to us,” Cook added.
‘Loss-making trades’
Quilter also takes a hit when trading ETFs in model portfolios with dealing charges raising concerns around consumer outcomes.
“If investors buy an MPS, they might be trading in small amounts, and if they want to invest 5% of the portfolio of £10,000 [in an ETF], we do not want customers' contributions being eaten away by dealing charges,” Cook said.
“We almost accept we pay more for our stock broking charges than we charge our customers, in time and with more scale it will not be a problem, but because we only have £300m we have an element of loss-making trades.”
To limit dealing costs, clients' money will be invested in two aggregated dealing points instead of the order being executed in real-time.
“Overall, we probably break even on [ETFs],” he continued. “We ultimately make some money from charging our platform fee whether a customer holds a fund or exchange-traded instrument.
“More usage of ETFs is going to mean often you are aggregating, and only incurring one stock broking fee.
“We are charging customers for individual orders which we may make a bit on, but the flip side is sometimes we lose [money] on a single customer so there is an element of cross-subsidy involved.”
The rise of fractional trading
Quilter does not currently offer fractional trading on its platform which Cook said does act as a barrier to uptake in model portfolios.
“We do occasionally have issues with ETFs which have really large prices. A consumer can try to pay on their debit card and can end up buying nothing. It becomes a failed order,” Cook said.
Some in the industry have urged ETF issuers to do more to reduce the share price of some ETFs to make them more accessible.
Last year, DWS said it was planning the stock split on four ETFs in a bid to make them more attractive, but later cancelled the proposals due to the rise of fractional trading capabilities among digital wealth platforms.
“It is on our propositional list of developments and we are talking to our platform provider and our stockbroker about that, but given the scale of ETFs at the moment, it will have a reasonable challenge getting up the priority list,” Cook added.
“As it becomes more commonplace, it will probably be easier for us to adopt.”
