European digital investment platforms boost demand for ETFs

Digital investment platforms are set to drive rapid adoption of exchange-traded funds by European investors, according to industry forecasts based on the emergence of new channels to access equity markets.

BlackRock, the world’s largest asset manager with approximately 65 million retail investors across Europe, estimates that only 5 percent of “wealth assets” are currently invested through digital platforms.

But the sudden rise of so-called digital “neo-brokers” on the continent is already changing behavior – most notably in Germany – and helping to drive ETF adoption.

Trade Republic — founded in 2015 and now the largest non-broker in Europe — has gained more than 1 million customers in 17 European countries. Other big names relative newcomers to the European investment scene, such as rival neobrokers Scalable Capital and Bux, are also attracting investors interested in exchange-traded products.

“In Europe, Germany is one of the fastest growing and largest potential markets,” PwC said in its recently released report on the ETF industry. “Growth is driven by growth in self-directed investors and ETF savings plans,” the report noted.

ETF Savings Plans are simply a regular investment product where investors commit to putting a certain amount each month into one or more funds. As such, the massive surge in popularity of the plans in Germany has left many in the industry surprised as there is no tax advantage to investing this way.

Scalable Capital said it reached 1 million individual ETF savings plans earlier this year, and two out of three of its investors use ETFs. It has also been found that the younger the investor, the more popular this form of investment is. At the end of January, nearly three-quarters of 18- to 26-year-olds using its site invested in ETFs; the ratio drops to 60 percent for people over 65.

ETF providers say neo-brokers and digital platforms could be game-changers. iShares expects 10 million new investors to use its ETFs in Europe over the next 10 years and estimates that assets managed by digital wealth platforms will reach $500 billion by 2026.

“Digital investment platforms are driving a wave of ETF adoption in Europe,” says Timo Toenges, head of digital wealth business iShares Emea. And the PwC report offers some reasons why: “Digitizing ETF distribution can reduce costs, improve accessibility and attract new investors.”

This use of “execution-only” digital platforms – which allow clients to invest without the advice of an intermediary – also appears to be part of a wider global phenomenon.

In its latest report on ETF distribution, Blackwater Search & Advisory, a consultancy, said institutions may still dominate in most parts of the world, but there is a clear appetite for going digital in certain regions.

In the US, where there is a stronger retail involvement in investments, consultants note the growing importance of social media in influencing investment decisions.

Meanwhile, in Asia, as well as in Europe, online trading platforms and robo-advisors – which can choose a portfolio for investors who answer questions about objectives and risk tolerance – are reported to be “in rapid expansion mode”.

But in Europe, digital platforms have been described as the “beauty of the ball”.

“Down the line, perhaps over the next 12 months and up to five years, the biggest growth will come from retail and the majority of European ETF issuers will be targeting retail channels to take advantage of this growth,” note the authors of the report.

Caroline Baron, head of ETF distribution in Emea for investment group Franklin Templeton, believes business is changing rapidly even in “closed-architecture” countries like France, where it has been so tax-efficient to invest through an insurance shell that distribution of products is heavily influenced by insurers. Now advocacy organization Better Finance points out that these insurance packages can lead to much higher fees that eat away at future profits.

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Still, Barron thinks it might be wise to take a cautious approach in markets where investors aren’t used to investing on their own.

“Perhaps the solutions need to be slightly adapted – for example offering portfolios of funds and ETFs, rather than letting investors build their own portfolios, as many may not know where to start,” she says. “And this is where distributors and financial advisors can add value.”

Either way, however, the new frontier for novice investors to navigate will move from fund composition to metrics such as exit fees, platform management fees and trading fees.

Regulators will have to grapple with how to force new digital platforms to be transparent about where they make their money. These sources of revenue can include platform fees, spreads between the bid and ask prices quoted for trades, and “order flow pay” – a practice that allows brokers to accept payments from market makers for directing trades to them , which allows prime brokerage fees to be kept low.

Variables like these make comparing platforms extremely difficult – as UK-based makes clear. But regulators say they are closely monitoring developments.

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