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Compliance, ETFs

ETFs minimise adviser compliance risk

ETFs compliance risks

A panel of industry stakeholders has agreed the use of exchange-traded funds can allow advisers to reduce their compliance risks.

Advisers can minimise their compliance risk through the use of exchange-traded funds (ETF) instead of picking individual stocks for clients wanting to invest directly on the Australian Securities Exchange, a panel of industry stakeholders has said.

“How do you give direct share advice to 100 or 200 or 300 clients in this legal framework? [So if I recommend clients to] sell Telstra, I’ve got to send 300 SOAs (statements of advice) and I’ve got to get the client to sign them before I can do this. What if they’re overseas?” Bell Partners Sydney head of advice Josef Stadler told delegates at the S&P Dow Jones Indices Annual Indexing and ETF Masterclass held in Sydney today.

“The compliance risks these days are huge on our businesses.”

Fellow panellist Private Capital Management managing director Nathan Ides said minimising compliance risk was one of the main reasons he uses ETFs for his clients.

With regard to the strategic use of ETFs for clients, Ides noted they are a great investment vehicle to help manage pension payment obligations for retirees.

“One of the goals [for retirees] is matching pension liabilities or drawdowns [to returns] within a portfolio. So if you’ve got a client around 60 years of age, how much income do they need to draw down each year? You’re looking at 4 per cent [of the pension value],” he said.

“So I’m not going to draw down on my capital for that. I want to make sure I’ve got income coming in to match those liabilities.”

He said an Australian equities high-yield ETF generating a return of around 5 per cent or 6 per cent would be suitable for individuals in this situation.

However, he suggested advisers should not limit their use of ETFs to just those covering Australian equities with this type of strategy.

“There are a couple of international products out there that are yielding between 5 or 6 per cent, so I would encourage you to look at those international products to get that income in the portfolio as well,” he said.

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