French retail investors: the new target for ETF providers
Romain Thomas writes from Paris that even if ETFs continue to break outstanding records in Europe, they have not been embraced yet by the financial adviser community in France.
The USD1 trillion ETF market remains largely unknown to French savers despite their explosive growth in recent years. In Europe, the ETF boom is mainly due to the enthusiasm of institutional investors for these liquid and low cost products, which are bought and sold on the stock exchange as quickly as a share.
On the other side of the Atlantic, the success of ETFs with individuals coincided with the arrival of draconian regulations prohibiting independent financial advisers (IFAs) from receiving remuneration from asset managers.
Sébastien d'Ornano, CEO of French on-line financial services firm Yomoni, says: “Traditionally investment products such as funds and structured products have been sold on a commission basis in France by independent financial advisers, who are compensated by the product provider.
“As ETFs have a low fee structure, it is not feasible to pay commissions, and hence to date ETFs have not been embraced by the IFA community”.
However, the regulations implementing the European MIFID II directive in force since January, 2018 offer more transparency as to the commissions received by active funds and prohibit asset management companies from making retrocessions to financial investment advisers.
Individuals should therefore turn more to passive funds benefiting from reduced fees such as ETFs, as these become more widely accessible via investment platforms and robo-advisers.
“It will be a step forward for retail investors, and also progress for the ETF industry,” according to Etienne Vincent, Head of Quant strategy and marketing at Ossiam, a subsidiary of Natixis IM.
ETF issuers are already honing their weapons to tackle this market. But it is important to note the cultural difference between French and US retail investors. In France, the vast majority of retail investors has traditionally favoured a saving attitude and remain wary of the stock market, with no active equity culture.
While on paper, ETFs are very attractive, in practice, their valuation depends on the movement of the financial markets.
For example, in a booming stock market, ETFs are a perfect product, reproducing the rise of the various indices that make it up, but conversely, the absence of intervention by a dedicated fund manager does not limit potential losses incurred when a market goes down.
According to a study carried out by Natixis Global AM, 84 per cent of financial advisers in France believe that their clients are not fully aware of the risks associated with index management. After interviewing 150 conseiller en gestion de patrimoine (CGP) - French independent financial advisers - the asset management group stresses that "low cost does not rhyme with low risk".
More than two-thirds of respondents (76 per cent) believe that investors have a false sense of security for their investments. It is not so much the ups and downs of the markets that worry them as the reactions of their clients, who can no longer bear high volatility.
However, for financial advisers, active management – that which does not follow the indices, but the convictions of the fund managers – is better suited to limit volatility and attenuate stock market fluctuations. In their eyes, these funds show better performance, make it possible to adjust the return to risk, and to better exploit market opportunities since the violent falls they experience are all opportunities to invest at a bargain price.
However, in France, new regulations should further encourage retail investors to adopt ETFs. In addition, the inclusion of ETFs in savings or investment plans is another area that will contribute to the growth of ETFs. Furthermore, in France, some ETFs are eligible for investment products, with considerable tax advantages such as the Plan Epargne en Actions (PEA) and life insurance (Assurance Vie), where they can be used as part of the core investment.
Bank and insurance companies, long reluctant to open their doors to these "low-cost" and low-paying products, are slowly changing their minds, "at the request of customers", says Vincent.
If insurers seem to have decided to turn the corner, 20 years after the arrival of ETFs in France, it is perhaps also because they see new competition emerging, which is betting on digital and ETFs, like Yomoni, a start-up in asset management business.
This young company, officially endorsed by the AMF (Financial Markets Authority) wants to be one of the best "made in France" replicas of the famous American robo-advisers, with websites which offer individuals the opportunity to invest their savings, scientifically and with lower costs thanks to algorithms… and ETFs.
A service that Yomoni has chosen to offer is life insurance, given its advantageous taxation. In addition, in France, a lot of new money is going to sustainable investment because regulation has played a major role in the development of investment sustainability, in particular through the European Union (EU) Sustainable Finance Action Plan.
However, recently, the Autorité des Marchés Financiers (AMF) has published a study which shows that most French people are interested in sustainable development issues, including in their choice of savings. This phenomenon should hardly slowdown in the coming years, especially driven by the pandemic.
“A lot of retail investors plan to increase their exposure to ESG ETFs in the coming years,” says Vincent. French investors seem to have become aware of climate risk, alongside a momentum for new asset inflows which should drive growth in ETFs.