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Going Public: Advisors Take Investment Ideas Mainstream With ETFs

In 2010, David Garff, president of RIA firm Accuvest Global Advisors in Walnut Creek, Calif., hit the five-year track record on his investment strategy that analyzes and ranks countries, rather than stocks. He started off using the strategy in separate accounts and offshore mutual funds, but he wanted to market the strategy to a broader clientele. Many FAs he spoke to didn’t like the SMA structure because of the paperwork involved, and others couldn’t invest in the mutual fund because it was not on their b/d’s platform. Recently, Garff decided to package the strategy in his own ETF (Ticker: ACCU), which is currently under SEC consideration.

“We wanted to be able to say, ‘Look, if you like what we’re doing and you can’t buy the separate account and you can’t buy the mutual fund, here’s the ETF,’” Garff said. “‘Here’s the ticker symbol. Here you go.’”

Garff is not alone. Recently, several RIAs have been launching their own ETFs as a way to take their investment strategies mainstream and build an identity in the marketplace. Exchange Traded Concepts, a firm that offers a platform for launching ETFs, has about 15 advisors who are actively in the process of coming onto its platform. Since early July, the firm has had conversations with more than 90 RIA firms that are interested in launching, said J. Garrett Stevens, CEO of ETC. AdvisorShares, which helps advisors launch actively managed ETFs, is on track to have 17 total ETFs on its platform by the end of the first quarter. Founder and CEO Noah Hamman said he has talked with 100 additional advisors interested in doing something like this. (Registered Rep. previously reported on do-it-yourself advisors who have been launching their own alternative funds.)

Garff’s Accuvest has clients from a wide variety of geographical locations and custodial arrangements, so the firm also wanted something that was one trade and could settle anywhere in the world. “We just want to take all the barriers to entry away for a couple of our strategies.”

Garff hopes to have the product on the market by the end of the year, but he’s already seeing demand for it. “Our pre-market launch demand for more information, for more conversation, is significantly higher as a percentage of conversation than it is successful in talking to somebody about using us as a separate account manager, because it’s easy, because it’s liquid, and because it’s a pretty understandable, straightforward story.”

Overcoming the Hurdles

About a year ago, Brian Evans, owner of BondStreet Wealth Management in Everett, Wash., woke up one morning with an idea for a new investment strategy, which involved reallocating to the S&P 500 based on valuations, not based on who’s biggest.

“Sometimes as an entrepreneur, you have different places where ideas hit you,” Evans said. “This was one of those ones where you wake up and as a believer, you might go, ‘Oh, wow! I think I’ve just been downloaded from above.’”

Because the strategy required quarterly rebalancing and 1,900 trades a year, Evans felt an active ETF was the best structure.

“Basically, I’d come to the conclusion that in order to have my own actively managed ETF, I would need to spend about a $1 million, take about three years, and I need to probably know people at the SEC,” Evans said. “But I felt like I had such a good idea I wasn’t going to let it drop just because that’s what people told me.”

He came across AdvisorShares, which already had exemptive relief from the SEC, which can take one to three years. ETC has exemptive relief to launch passive ETFs, and recently filed for active relief as well. AdvisorShares and ETC will also handle the operational and regulatory hurdles to getting an ETF off the ground. Under both platforms, the advisor acts as a sub-advisor on the fund, with their name on the fund. Stevens said by using such platforms, advisors can spend their time building their brand, marketing the fund and bringing in new assets.

Reaching New Clientele

Launching their own ETFs is also a way for advisors to reach a broader array of clients, especially smaller ones, Hamman said.

Clients with lower asset levels often cannot access SMA strategies because the minimums are too high, said Christian Magoon, CEO of Magoon Capital, an asset management consulting firm. Most managed account strategies have to go through a long approval process; there are also shelf space issues and long due diligence processes related to SMA strategies, Magoon said.

Marcy Burton, a managing partner at Partnervest Financial Group in Santa Barbara, Calif., expects to launch the firm’s Global Buy/Write ETF Fund on the AdvisorShares platform at the beginning of next year. Burton wanted to give smaller investors a way to access the same sophistication of the firm’s managed account strategy. Active ETFs are more cost-effective and operationally efficient for smaller investors, she said.

Because ETFs are publicly-traded on an exchange and their track record is visible, the structure can be a way for advisors to get their name out to investors they would never even come in contact with, Stevens said. “There’re a lot of small RIAs that no one has heard of.”

Darren Schuringa, portfolio manager with Yorkville Capital Management, which is launching funds on ETC’s platform, said there are a lot of boutique advisors with a background and expertise in a specific area of the market, but no way of getting their ideas out there. “You’ll sit in obscurity no matter how good you are.”

Pending SEC approval, Schuringa will roll out an alternative income strategy, which provides bond-like characteristics. Yorkville partnered with ETC because the firm wanted a way to get exposure for their strategy without having to hire a distribution force. The move also saved him about $1 million up front. “Now at least we’re going to get to the dance,” he said.

Stronger Client Relationships

Some advisors, including Evans, are finding that launching an ETF can strengthen relationships with existing clients by reinforcing the value-add.

“A lot of people are thinking about, ‘Well, what do I need an advisor for?,’” Evans said. “‘I haven’t made any money in the last five years. Why do I need this advisor?’ To continually have a story and keep that story at a high quality and have a value-add proposition, everything in the portfolio is pretty key to keeping these relationships strong.’”

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