Traditionally, investments were all managed through financial advisors and/or brokers, with investors seeking personal advice from a human advisor who knows them, their financial situation, and their appetite for risk.
But the financial times, they are a-changin', and today's investors are a lot more likely to swap tips on Reddit and make trades through RobinHood than to consult a financial advisor or fund manager. Investment management technology in the form of robo advisors and robo investment platforms is ascendant.
The rise of digital fund distribution
This rise in adoption of investment management technology has been beneficial for the investment world. It's democratized access, making it far easier for investors to manage their own portfolios, and it's done particularly well at opening up investment for digital natives who are used to doing everything on their phones.
Not surprisingly, the COVID-19 pandemic drove interest in asset management technology, just as it accelerated digital adoption in every vertical. More investors switched to robo-advice and online investment platforms when face to face appointments became impossible, and very few are interested in going back to the old ways.
As a result, asset managers, distributors, agents, and other fund actors have followed the crowds to distribute their financial and investment products through more digital channels. It's beyond time for ETFs to follow suit to increase brand awareness and increase lead generation.
Digital distribution opens up data analytics
The general investment fund industry has lagged behind other financial verticals, such as banks and insurance companies, in making use of data analytics. They lack visibility into who their customers are, their investment preferences and patterns, attitude to risk, etc. and that needs to change rapidly in a world where data is the new oil.
Digital distribution enables ETF managers to access the quality, trusted data that other verticals already enjoy, so they can better predict investor behavior, personalize financial products, and improve the quality of their product offering.
With trusted data insights, investors also receive a better user experience. They'll be able to quickly and easily tap into the information they need to make better investment decisions, so they can find the ETFs that match their values, financial situation, and risk capacity.
"The goldilocks moment will be when firms are able to predict and interpret what clients really need based on the data," said ETF expert Michael O'Riordan, adding "The “Amazonisation” of the asset management industry still feels very much a pipe dream right now."
ETFs and robo-advisors are a perfect match
Experts believe that new technology in investment management is ideal for ETFs. Jerome Gudgeon, head of managed services at investment technology provider JHC, argued the point years ago, saying: "Digital technology is the key for ETF distribution. Traditional funds were suited to the offline world as they are only priced and valued once a day, whereas ETFs, being more dynamic, are ideal for online."
Robo-advisors suit the more straightforward fee-based approach, rather than the old commission-based or "bundled" models, and ETFs are widely seen as a good match, since they too are transparent. In a recent Global Investor Experience report, Morningstar shared their support for using robo-platforms to distribute ETFs. “As inherently ‘clean’ share classes that exclude initial charges and ongoing commissions, ETFs are particularly well-suited for use in unbundled advice programmes, which we maintain are an industry best practice,” it said.
ETFs and robo-advisors also share a significant overlap in their audience. ETFs are ideal for small scale retail investors, people who are new to investing, and those who want to invest passively, because they offer diversification at low prices, and are simple investing vehicles that are easy to understand. The same market isn't willing to pay high fees for advice from a human advisor, and wants easy ways to manage their investment themselves.
Digital distribution democratizes access to ETFs
The recent shift from a commission-based to fee-based model is welcomed, but some are concerned that it's shutting certain investor classes out from badly needed information and insights.
Many people, especially those just dipping their toes in the system, want to keep down associated costs, so they're more likely to avoid advisors who charge high fees. Robo-advisors are able to explain the features and functionalities of different investment options effectively and at low cost, so ETFs need to climb on board.
With digital distribution, ETF managers are able to reach the younger generation of investors who have embraced digital investing, especially during the pandemic when they were home, bored, and looking for ways to make more cash. 2020 saw trading app adoption soar, with Robinhood reporting that funded accounts jumped from 7.2 million in March 2020 to 18 million in March 2021, and eToro hitting 20 million users in the same month.
Digital distribution broadens reach for ETFs
Today's investors want to access information independently online, just like with every other purchase. They expect to read reviews, ask for recommendations, compare their options, and then make the transaction securely and transparently.
That means that all funds need to move to digital marketing, both to gather insights into customer behavior and to extend their reach in promoting financial products. Robo investment platforms are a key way to increase exposure to funds, and to access vital customer data.
ETF marketers should be focusing on expanding awareness of their ticker brand through any means possible, and digital distribution drastically raises impressions through broadening their audience. Digital marketing, including digital distribution on robo-investment platforms, helps generate a bigger mass of leads, leaving it for wholesalers to follow up and complete the sale in a platform-agnostic manner.
Analysts also point out that digital distribution offers a key way to differentiate your ETF at a time when more funds than ever are coming on the market. ETF investors can choose between thematic ETFs, active ETFs, crypto ETFs, equity and fixed income ETFs, and more. Robo investment platforms provide better ways to educate investors about key features of your fund, so they can make better decisions and you can attract the investors you're looking for.
ETFs need digital distribution
Digital distribution is already helping ETFs reach a bigger market. In Germany, for example, there's been a surge in uptake for ETF savings plans through online platforms or apps, with purchases jumping from 500,000 in June 2017 to almost 5 million by March 2022, BlackRock predicts that this will swell to 20 million by 2026. A PWC survey found that 84% of ETF executives expect online platforms to represent the primary source of future demand for ETFs.
By helping ETF managers extend their reach and understand investors, and democratizing access to ETFs for investors, digital distribution is a key way for ETFs to differentiate themselves and improve their marketing.