Sales of exchange-traded funds have grown rapidly as banks look to amplify their open architecture and private-client wealth offerings, according to Barclays Global Investors, whose ETF assets under management in the bank channel rose 110%, to $16.2 billion, in the 12 months through August.
ETFs have become popular with many financial intermediaries, including banks, in recent years, according to David Gardner, the national sales manager for private wealth management at San Francisco-based Barclays Global Investors. The company is a subsidiary of Barclays PLC, a multinational banking company based in London.
Barclays initially marketed its iShares ETFs exclusively to institutional investors, many of whom were already familiar with the product. The company began offering the products to retail investors through top-tier banks about two years ago after beginning extensive marketing and investor education efforts, Mr. Gardner said.
The company now has an iShares Web site specifically for individual investors. It features basic ETF information, as well as fund screening and portfolio diversification tools.
Retail customers like ETFs because of their tax efficiency and low management fees, Mr. Gardner said. Some industry experts believe the products, which often carry expense ratios of 0.30% or less, are more tax-efficient than mutual funds because redemptions by large investors are paid in kind, meaning ETFs do not have to sell stock at a gain in order to make payouts.
Banks have been particularly eager to add ETFs to their investment platforms, Mr. Gardner said. The products can help banks diversify their investment offerings and bolster their fee-based brokerage business, he said.
In recent years banks have tried to attract wealthy clients by offering open architecture platforms with a wide selection of investment options, Mr. Gardner noted. ETFs can help banks round out their investment offerings and may prove especially attractive to high-net-worth clients who are looking to limit management expenses and keep their tax payments low, he said.
“The trend toward open architecture is really kind of redefining the banking space right now as banks compete to collect high-net-worth clients or retain existing high-net-worth clients,” Mr. Gardner said.
ETFs may prove to be a boon for banks as wealthy investors demand more sophisticated investment products, said Burton Greenwald, an analyst for the BJ Greenwald Associates consulting firm in Philadelphia.
“Historically, the bank channel has not served the high end of the marketplace for the retail investor,” Mr. Greenwald said. “With ETFs, they’ve been able to embrace a relatively sophisticated product and develop sophisticated asset allocation programs for high-net-worth investors. They give banks an opportunity to go upscale.”
Banks can also market ETFs to mass-affluent investors because the funds are fairly simple to explain and can help clients diversify among several asset classes, including bonds and international stocks, he said.
“The variety of choices available in the ETF field has just exploded over the past two or three years,” Mr. Greenwald added.
Some investors also favor ETFs because the product is thought to have a more transparent fee structure than that of mutual funds, Mr. Gardner added. Unlike mutual funds, ETFs typically do not collect 12b-1 marketing fees.
Banks are also adopting ETFs more widely as they look to make the transition from transaction-based to fee-based brokerage services, Mr. Gardner said. As they move toward fee-based brokerage, banks are bolstering their efforts to attract wealthy investors, who generate higher commissions when investing through a fee-based model.
Furthermore, he added, the ETF product may ultimately be more widely offered in 401(k) plans as defined contribution plans introduce self-directed brokerage options.
Barclays, which has more than $140 billion of assets under management in its iShares from all distribution channels, plans to expand its ETF offerings in forthcoming years, Mr. Gardner said. In particular, it wants to roll out more fixed-income iShares soon.
