When you see a sundial or a water-clock, you see that it tells the time by design and not by chance. How then can you imagine that the universe as a whole is devoid of purpose and intelligence, when it embraces everything, including these artifacts themselves and their artificers?— Cicero
The term "intelligently designed" as used herein simply means products and services that are best suited to meet the needs of individual investors. It means product and service features as investors would have created on their own - efficient, independent and consumer-focused.
It has been approximately six months since Servant Financial was formed, and approximately one month later our first article was published on our corporate website. Although six months is a relatively short time frame, we thought it an appropriate interval to take stock of the investment advisory industry and our investment and service philosophies.
Already two very powerful investing trends have started to emerge. Individual investors are increasingly showing a strong preference for more intelligently designed investment products and services - exchange-traded funds (ETFs) for greater efficiency and lower cost and independent advisors providing more advice-driven, consumer-focused services.
In our initial article "ETFs: Cutting-edge Technology Benefits Individual Investors," we shared the following views about the future investment landscape with the advent of ETFs (emphasis added)
Like iPods, ETFs share the winning attributes of lower cost and greater efficiency and reliability as compared to existing products. As so aptly pointed out by David F. Swensen in his book "Unconventional Success: A Fundamental Approach to Personal Investment", ETFs offer retail investors the efficiency and performance reliability of distributed institutional investment management at very competitive prices. Like other dominant technologies, ETFs will be a very disruptive influence on the retail investment advisory industry. ETFs will not only be a competitive challenge to the traditional mutual fund industry, but will also improve how investment services are delivered to individual investors. Informed retail investors will be increasingly resistant to current industry practices in which an investor essentially pays an adviser to sell them investment products and services. There will be limited room for high sales loads or commissions for ETFs because part of the technology gap these products address is the efficiency of current investment product distribution and sales practices.
Accordingly, the investment advisory industry is in the nascent phases of a dramatic, secular change toward advice driven, consumer focused investment advisory services and away from traditional sales driven business models. The return reducing costs of sales and marketing activities together with the potential for benchmark underperformance from active investment management will increasingly give way to an information driven cost/benefit focus by individual investors.
Taking a look at recent investing trends we begin to see the disruptive impact of ETFs. The ETF industry is growing very rapidly as the product becomes increasingly popular with investors. An April 25, 2006 Morgan Stanley equity research report stated that aggregate ETF assets totalled $350 million as of April 21, 2006 after strong net cash inflows of approximately $60 million in both 2004 and 2005 (Morgan Stanley compiled this data from information reported separately by each ETF advisor and trustee).
A recent article by Rob Wherry on ETFs in Smart Money magazine entitled "Too Much of a Good Thing?" provided the following comparative insight on ETF cash flows:
Exchange-traded funds are pulling in assets six times as fast as traditional mutual funds, as investors use them to get stock market exposure at rock-bottom prices.
The following excerpt from this article highlights the disruptive impact ETFs are having on the competitive balance in the investment advisory industry.
Once an arcane niche, exchange-traded funds have attracted so much money that even jaded Wall Streeters have been forced to stand up and take notice. Last year alone investors poured $54 billion into ETFs, which are low-cost baskets of stocks that track indexes but, unlike traditional mutual funds, trade all day long on the stock exchange. The field is dominated by Barclays Bank and State Street but is quickly becoming crowded with competitors. Little wonder then that ETFs have caught the attention of two of the biggest names in the fund business: Vanguard has launched 21 ETFs over the past two years, while Fidelity slashed the costs on some of its index funds to better compete.
In addition to reassessing which investment products to use to achieve their goals, individual investors are also rethinking their investment advisory service relationships. Individual investors are more frequently opting for the independent advisory business model that is best suited to provide the advice-driven, consumer-focused services they desire.
In the April 29, 2006 Saturday Edition of The Wall Street Journal, there was an insightful article by Jeff D. Opdyke and Lingling Wei entitled "Stockbrokers Loosen Up Their Ties" which highlighted the fundamental reasons for the increased popularity of independent advisors among individual investors. This excerpt summarizes one key perceived benefit of independent advisors:
Wall Street's giant brokerage firms -- long the dominant force in the investing game -- are starting to lose their edge.
Increasingly, individual investors are turning over their money to independent brokers and advisers amid worries that big firms don't always have their best interests at heart. Over the past five years, independent advisers have nearly doubled their share of assets under management to 17%, according to discount brokerage firm Charles Schwab.
It is apparent from the foregoing emerging investment trends that individual investors are showing a clear preference for more intelligently designed investment products and services. We expect that these trends will continue to reshape the investment advisory industry.
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