A reader of my column – a high net worth reader – wants to switch some money from his advised account to exchange-traded funds bought through an online broker.
Here's why both the online brokerage and ETF businesses are very possibly going to miss out on his business: They can't get their act together to produce a seamless, low- or no-cost pre-authorized contribution plan. This investor wants to put his investing program on auto-pilot, which makes a heck of a lot of sense both for him and the investment firms he deals with. But no one in the frontline investing business seems interested.
Investors, ETFs beat mutual funds in so many different ways. But if you want to invest automatically through regular contributions, mutual funds rule.
There's a niche online broker that offers a PAC plan using ETFs – ShareOwner. You can set up a regular investment plan with dividend reinvestment for various stocks and ETFs, or you can make regular contributions to model ETF portfolios that offer automatic rebalancing. But ShareOwner is an operation best suited to long-term wealth-builders who don't want to trade much and don't need access to a wide menu of investments, tools and services. A lot of investors, including the reader I mentioned, prefer to be at a mainstream online broker.
A few of these mainstream firms offer either a limited or unlimited menu of ETFs that can be bought commission-free. That's a good start in attracting clients who want to make regular monthly or quarterly contributions. But a further level of automation is required - investors should be able to specify which ETFs they want to buy regularly and have a pre-set amount of money invested in each. ShareOwner lets clients put all their money to work by allowing them to buy fractional shares of ETFs and stocks. Other online brokers could simply tell clients they'll get the most possible full shares for the money they intend to invest every month of quarter. Remaining cash could be held in cash and used on their next scheduled ETF investment.
Claymore, an ETF company bought up by BlackRock's iShares franchise several years back, offered a PAC plan for its products, but brokers never widely adopted it. Now, it's time to revisit this idea. Investors want to do the right thing by automating their ETF purchases. Surely brokers and ETF companies can figure out a way to accommodate them.
Rob Carrick