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ETFs and Passives: Opportunities in Digital Wealth – Markets and Securities Services Outlook
16 Plays4 years ago
Digital wealth is increasing across the globe and the direct-to-consumer market is growing at an enormous pace. In the UK, for example, the DTC market doubled between 2015 and 2020. What does this mean for you and your clients?
In this podcast, host Paul Heffernan, Leader of the Asset Management Sector in Europe for HSBC, is joined by Carmen Gonzalez-Calatayud Brummer, Head of ETF Capability at HSBC, Joe Parkin, Head of Banks and Digital Channels at BlackRock Investments, Pacome Breton, Director of Investment Risk at Nutmeg, and Steve Palmer, Managing Director, Global Head of ETF Product, HSBC. They discuss how technology is changing the investing landscape and bringing more opportunities to more people. They also examine the ETF environment and explore why this particular financial instrument is so attractive at the moment.
Markets and Securities Services Outlook is a podcast miniseries exploring the critical topics that will shape our industry in the next decade, including sustainability, digitalisation and emerging markets. Find out what’s driving the global outlook for institutional investors and where the opportunities and challenges lie. For more information, visit here.
This episode was recorded on 9 June 2021.
Hosted on Acast. See acast.com/privacy for more information.
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Transcript
Introduction to HSBC Global Viewpoint and Podcast Series
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Speaker
This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
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Thank you for listening.
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You're listening to the Markets and Security Services Outlook, a podcast miniseries exploring the critical topics that will shape our industry in the next decade, including sustainability, digitalisation and emerging markets.
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Find out what's driving the global outlook for institutional investors and where the opportunities and challenges lie.
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Thank you for joining us.
Meet the Expert Panel: Digital and ETFs Focus
00:00:55
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Hello and you're all very welcome.
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My name is Paul Heffernan and I lead the asset management sector in Europe for HSBC's security services business and I have the pleasure of being your moderator today.
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We are absolutely delighted to have assembled an expert panel who are all both passionate about digital and passionate about ETFs.
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I'm first joined by Carmen Gonzalez-Chalathayud who is head of ETF Capability at HSBC's asset management business.
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Next, we have Joe Parkin who is head of Banks and Digital Channels at BlackRock.
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Next, we have Pakon Breton, who is Director of Investment Risk at Nutmeg, one of the first and largest rover advisors in the UK.
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And finally, we have Steve Palmer, who needs no introduction into ETF circles and was recently named as one of the most influential people in the ETF ecosystem.
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the ETF trading and sales desk in HSBC's Markets and Security Services division.
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You're all very,
UK DTC Market and the Rise of Robo-Advisors
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very welcome.
00:01:48
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Diving straight into the topic, Pakom, opening up to you for a second, I know you've got some interesting stats on the size of the DTC market in the UK in particular.
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Could you share some insights into this, please?
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Yeah, sure, Paul.
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I mean, in terms of size, the UK market is around 300 billion at the end of 2020.
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And it has doubled since 2015.
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So it's really on a rising trend over the last over the last few years.
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And some aspects, for example, for us at Nutmeg, where we are more involved, which is what you would see as robo-advisors, for example, it's at the moment around 3% of this total amount in terms of AUM, but it's around 20% of the customers.
00:02:33
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Discrepancy is quite interesting, especially as you have on average investors that are much younger than the average D2C investors.
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And so the math is pretty easy.
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So a lot of customers that are not as rich as the older ones using a digital platform, a digital wealth manager like us.
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And this part of this year is going to grow up in the future when this large number of customers are getting richer or even are going to inherit the wealth of the older generation somehow.
00:03:03
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Some nice stats there, Pak Holman.
00:03:06
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D2C market is not a UK phenomenon.
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It's across geographies
Growth of Digital Wealth in Europe
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and across regions.
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And I'm drawn specifically to ETFs and some recent research in Germany that in 2020, there was over €4 billion allocated into online ETF saving plans, which was up 80% on 2019 figures.
00:03:27
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And if you look at the first quarter trend in 2021, that growth is actually accelerating.
00:03:33
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Joe, any insights to share in terms of Germany or any other markets and what's driving this growth?
00:03:38
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Yeah, I mean, I think, you know, we see the growth of digital wealth really across the world, right?
00:03:43
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I mean, it's, you know, and I think it's a fantastic thing because I think for a long time, wealth has been about the wealthy.
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And I think where technology has got two technologies, the enabler of financial inclusion, and now we can deliver
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through technology, wealth management services to help people get financially healthier.
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I think when we look specifically in Europe, I think PacOn is absolutely right.
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The UK and Germany are leading the way in terms of Europe.
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In the UK, I think anything I'd add to what PacOn was saying was really like 2020 was a pretty big year.
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And 2021 has continued to be, you know, there's no momentum lost off the back of COVID.
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And so if you think off the back of COVID-19, we estimate that 1 million new customers, you know, kind of became digital investment customers kind of in 2020.
00:04:35
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And we also think assets are going to continue to grow, you know, by around 20% per year.
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So by the end of this year, we think assets in digital channels in the UK will be at 350 million.
00:04:47
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350 billion, sorry.
00:04:48
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In terms of Germany, Germany has, compared to the UK, which got 6.8 million D2C users, Germany has about 9 million.
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And I think the big differentiator with Germany is ETF savings plans.
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have become kind of the norm there, you know, the ETF and particularly monthly savings plans.
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And so these have grown, I think they grew 35% in 2020, but just extraordinary growth we're seeing, I think, both in the UK, you know, kind of and Germany.
00:05:19
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And, you know, the COVID effect, which many people thought, you know, might as we came out of the COVID-19 crisis might slow down, actually hasn't at all.
Fintechs Transforming Financial Services in Europe
00:05:30
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And any other markets in Europe that we're seeing kind of catch up with the rates that we're seeing in Germany and the UK?
00:05:36
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Yeah, I think the whole thing is kind of evolving and changing.
00:05:40
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You know, we're probably three years in now since Mifid, you know, and I think Mifid, you know, has been a big catalyst.
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But I also think we're seeing the rise of fintechs, which, you know, kind of aren't necessarily geographically based.
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You know, so whether it's the sort of commission-free trading apps, whether it's some of the robo-advisors who have managed to scale themselves across Europe,
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I think it's going to affect every single country and firms that have either started in the UK or Germany or potentially in other ones actually are now starting to think about other European countries.
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So be that Italy, France, Spain, the Nordics is a fantastic place in terms of particularly the digitalisation that goes on within the banks.
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Thanks, Joe.
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And then moving the conversation into another region in Asia, maybe specifically China.
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Carmen, if I go over to you, I mean, I saw some interesting stats recently where the suggestion was the investment from digital platforms into investment products in China actually outstripped those of local banks, which is a first quarter in 2021.
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That's a phenomenal statistic.
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Any insights you can share into the D2C channel in China?
China's Digital Investment Boom
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Absolutely.
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I mean, I think one of the things that we need to, we almost need to take a step back when we talk about China, because especially when it comes to digital economy, when it comes to digital investment, they are at a different level, I would say, in terms of the numbers that we look at.
00:07:09
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And if you look at the share of a digital economy during COVID-19 alone, the share of digital economy overall has gone up from 17%.
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to 36%.
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That already tells you that the use of digital tools in general has a much wider penetration in countries such as China than it does in Europe.
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Then, if you're next to it, you also have to put the other statistics as to how the demographic changes or
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the changes are happening and what this effect of having such an implementation of the digital economy is also having on the individuals who live in China.
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So, you have 2 million high net worth individuals, you have 340 people in what we call the middle class.
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For the high net worth individuals alone, at the moment, you have something like 10 trillion of assets that they can invest
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And this is expected to grow over the next five years by 60% to almost $16 trillion.
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Same thing for the households.
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They're expected to grow.
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Their disposable income, to a certain extent, is expected to grow to $46 trillion by 2025.
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So it's only if you then put it next to investor behavior.
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Traditionally, Chinese investors have looked at property to put their money in.
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But increasingly, the younger generations who accumulate their wealth much more through the digital economy, they also want to invest it via the digital economy.
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So you almost are creating a perfect storm for massive growth.
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And if you look at firms such as Alibaba, and so they
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Their market share alone shows you that this is the way people, the younger generations in particular, are choosing to invest.
00:09:02
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Finally, the one statistic that I thought was very interesting as well from HSBC research was around how investor behavior has changed.
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Again, this benefits the digital channels.
00:09:15
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In 2001, 50% of assets were in cash.
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This has dramatically changed.
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Last year in 2019, 52% of assets were in stocks and options.
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How are people going to buy them?
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Through the digital tunnels.
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More and more, they're not going to go to their bank to buy them.
00:09:33
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Thanks, Carmen.
00:09:34
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Some great numbers in there.
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Like anything in China, always phenomenal numbers.
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So thank you for that.
00:09:41
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In terms of just moving the conversation a little bit, maybe Pat, coming back to you for a second,
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The whole notion of client acquisition in two digital web channels, the prize for successful D2C platforms is having scale in the clients.
00:09:56
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And I think you had a stat earlier on where D2C in the UK had about 3% of assets, but had almost 20% of the customer
Investment Platforms Adapting During the Pandemic
00:10:04
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base.
00:10:04
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How does someone like Nutmeg compete in this space?
00:10:07
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Clearly, you were early adopters, but how do you compete to gain market share from a number of customers' perspectives?
00:10:13
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Yeah, I mean, it's interesting.
00:10:15
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I mean, first, as Carmen was mentioning, I mean, the period of the pandemic actually has seen really a shift in terms of customers, even for us.
00:10:25
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For example, we went from something like 95,000 customers to around 150 now over the 16 months of the pandemic.
00:10:33
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So, yeah.
00:10:34
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At a time where we've seen the saving rate increasing massively in the UK, but as well in the rest of the world, we've seen it as well in the US and as well in Asia, a lot of people were facing themselves with much higher savings than before.
00:10:49
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And so they were wondering where to put their money.
00:10:52
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And actually, what's very interesting what happened is people were using the Alibaba or the Amazon or the Deliveroo to get their things delivered during this pandemic.
00:11:04
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And they thought about doing the same for the investments.
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So what's available online?
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I want to do to invest in the way I consume, basically.
00:11:12
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And so that's where digital wealth managers are really relatively well placed.
00:11:17
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because going to the typical local branch or having a coffee with an advisor seems to be a bit less what they want to do.
00:11:25
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And so this has created really a place where people use it in the same way they use it for the rest of their life somehow.
00:11:33
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And so we've seen this phenomenal growth
00:11:36
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in terms of number of customers, but as well assets that are coming into our business and as well our competitors.
00:11:42
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I mean, we're not the only one to gain a market share somehow.
00:11:47
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And we can expect that this is going to stay.
00:11:50
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I mean, people who've used Amazon or have used online, are buying online, are unlikely to go totally back to where they were before.
00:11:59
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And I think here it's more, we see it as more or less the same.
00:12:02
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This shift is going to stay.
00:12:04
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People are probably going to save more as well.
00:12:07
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And this younger generation is going to be used.
00:12:10
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They want the same service from their investment manager than they're getting for the rest of their online spending.
00:12:17
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And that's what they are getting more and more.
00:12:20
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And that's why we're trying to provide them, actually.
00:12:23
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I guess, Paul, if I can just chime in, I think the other important point to make is that the likes of Nutmeg and these digital wealth managers can actually start, they can use the ETF, bring it back to the ETF.
00:12:34
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The ETF is the building block.
00:12:36
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So through the creation of an ETF, you have this ability to specialize.
00:12:42
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You have the Nutmeg specializing in the management of the monies.
00:12:45
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You have HSBC on my desk, you know,
00:12:48
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specializing in the actual execution of those trades.
00:12:52
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Of course, Carmen and her team specializing in the creation of the building blocks and black blocks of this world in the same.
00:12:58
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It's that specialization, which is again about technology.
00:13:01
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It's the use of technology.
00:13:02
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The ETF itself as a wrapper is a piece of technology.
00:13:06
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All of these things combined allow for these fintech firms, these digital wealth managers, robo-advisors to then start specializing in the way that we are seeing.
00:13:14
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So again, we're talking about the same thing.
00:13:17
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Again, we're talking about technology and how the ETF is the enabler.
00:13:21
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It's the building block that enables the digital wealth channels to exist.
00:13:25
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I would add to that, Steve and Pakom, that what makes the ETF particularly suitable as a building block, it's also the transparency requirements that they have.
00:13:37
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all the data that is published, you can see it ticking throughout the day.
00:13:41
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A digital investor in particular is one that will want to see their portfolios ticking away during the day and so on.
00:13:49
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Through the digital platforms, they have that life on their screen.
00:13:56
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And this is sort of back to the points that we're all making about having control, about making your own decisions.
00:14:04
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These tools enable you to do all of that.
00:14:06
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And this is the world we're starting to get used to more and more.
ETFs: A Technology Enabler for Digital Wealth
00:14:10
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And this is why we're all expecting that this digital embracing of digital wealth is going to increase, even with, I would dare to say, not only the younger generations, but it's this power and this control that these tools give you.
00:14:27
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And as I say, with the ETF, because it takes away on the exchange, you have everything you need.
00:14:34
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Well, it's precision, isn't it?
00:14:35
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You can be precise about how you construct them.
00:14:38
Speaker
And I think we'll go on to talk about ESG, but then you can add on all these ESG flavors.
00:14:45
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You can do all these things.
00:14:46
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But to your point, at the end of every day, I can log on to my digital wealth manager and see exactly what my pension is worth.
00:14:53
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That access, that precision is only achievable through these building blocks, which is part of the whole digital story, I think.
00:15:02
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I think they're the perfect bedfellows, right?
00:15:03
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If you think about what ETFs have done, ETFs are a technology, they've democratized investing, incredibly transparent and low cost.
00:15:13
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And you think about what the digital wealth players have kind of done, it's exactly the same.
00:15:18
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They've democratized investing.
00:15:21
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I would just say a couple of things though.
00:15:24
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I think we've now got to a place where the digital wealth managers are getting smarter and smarter about how they engage customers.
00:15:31
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I think the first round of Robos, which Nutmeg was obviously a part of and survived through, growing on to be what they want to be, there's probably very few of them actually left.
00:15:42
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I think offering a sort of ETF portfolio and selling it like you did to everyone actually showed that kind of was that what people actually needed?
00:15:53
Speaker
And I think the firms now are building it
00:15:55
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whether it's into the banking savings and investment kind of journey and ecosystem, or they're building it into everyday life, or they're making it seamless, or they're making it really specific about around the segmentation point.
00:16:08
Speaker
So I think we've seen probably like two or three evolutions of the digital wealth market to where we are now.
00:16:15
Speaker
You know, I probably think there's a further iteration where actually it doesn't just become about digital wealth, it becomes about your personal financial hub.
00:16:24
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about your savings, about your investment, about your other asset classes, about your insurance.
00:16:31
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So that actually, rather than having Nutmeg and four or five other apps you might have in order to manage your finances, it actually becomes kind of holistic.
00:16:41
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The only other thing I'd say is I think within the industry, we all feel that, and we all understand the power of ETFs, what it's offered Nutmeg to do and various other people managing money.
00:16:50
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But in the similar way to the car, you know, I do like this kind of car analogy where ultimately, like I'd say 80 percent of the population really have never seen the engine of their car.
00:17:00
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They know what it does.
00:17:01
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They know how it works.
00:17:02
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They know it's diesel petrol and they might know or electric.
00:17:06
Speaker
And they decided to buy an electric car, i.e.
00:17:08
Speaker
an ESG portfolio.
00:17:10
Speaker
But actually, if you open up the engine, they wouldn't have any clue what the different parts are or anything like that.
00:17:15
Speaker
And I think investing is quite similar.
00:17:17
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And I think the mistake we've made in the industry more broadly, actually, I think the digital wealth guys are kind of correcting this is you walk into a car showroom, and there'll just be a load of engines.
00:17:26
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And you'd say, you know, 80% of the population, the petrol heads who are already kind of, you know, trading themselves, single stock, single bonds, whatever they may be, are going to love that.
00:17:35
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But actually 90% or 80% of the population are going to go, well, I want to see the colour, I want to see the sunroof, I want to see the radio.
00:17:42
Speaker
And I think that's where the digital channels can bring, you know, they can make it, you know, seamless on your on your iPad or iPhone, which I just think is a fantastic innovation.
00:17:51
Speaker
You know, it's basically made it like every other industry, right?
00:17:54
Speaker
Every other industry, you have that experience.
00:17:56
Speaker
And the wealth management industry, you know, until really, you know, Packon came along, like it didn't really have that experience.
00:18:03
Speaker
One point I would add is clearly the will to educate people, but to do it in a really simple manner and with a jargon that is
00:18:11
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Easily accessible, even on some more difficult concepts, has been always core of what we do.
00:18:19
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And we get, I think, so many customers as well, we get a lot of feedback of what interests them, what's not interesting for them.
00:18:25
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And so we're constantly evolving our learning curve and what we can share in terms of the way we developed the portfolios, the way we invest and all the building blocks around it.
00:18:38
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In order for people that if they really want to see the engines, they can see it.
00:18:42
Speaker
And we give a lot of opportunities to understand it in a transparent manner.
00:18:46
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And that is pretty important.
00:18:48
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And especially, I mean, clearly, for example, in the UK, when we had some scandal like the Woodford case, where people are a bit unhappy about the lack of transparency that they are getting directly or that they are seeing on the newspapers.
Banks vs. Digital Platforms: Competing for Clients
00:19:03
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And they're very keen on getting fees and transparency combined in their digital investment experience.
00:19:10
Speaker
I believe.
00:19:11
Speaker
I think I would like to pick up on one of the points that Joe makes, because I think that's also quite important in understanding the evolution of digital wealth and that investors or people are demanding more and more to see everything together, their insurance, their investments, their, you know,
00:19:28
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savings plan, whatever, whatever.
00:19:30
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And I think this is a bit where the banks come back in and where I think that this is what we're seeing a bit as the next, I don't know, we can talk about 2.0, 3.0, I don't know which number we are, but it's the next evolution in digital wealth.
00:19:48
Speaker
And I think you will have a
00:19:50
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highly specialized, not highly specialized, but to a certain extent, more shops such as Nutmeg, which is very much specialized on the investment.
00:20:02
Speaker
But you will also, the banks have to catch up so that they can offer what Nutmeg offers for their overall portfolio.
00:20:11
Speaker
And I think this is the revolution, in my view, that is happening to a certain extent at the moment, that the banks have to catch up.
00:20:18
Speaker
And what NAPMIC has given, or companies such as NAPMIC have given as an example, the big banks have to follow now.
00:20:25
Speaker
And they have to apply it across the board, all the services that they offer, everything that's available to the client.
00:20:31
Speaker
And I think that's a positive evolution of the market, of the financial services, but in general, of the market in general.
00:20:39
Speaker
And that's a very interesting point, Carmen.
00:20:42
Speaker
And just touching on that for a second, I mean, certainly in Europe, perhaps less so the UK, banks have dominated distribution for a long time in terms of direct, and they own the customer.
00:20:51
Speaker
And clearly, from the research that you've shown, the newer customers are being gobbled up by digital channels.
00:20:57
Speaker
But can the, I'm going to call them the digital pretenders, can they really take on the mighty banks?
New Battlegrounds for D2C Investors
00:21:02
Speaker
And what I mean by that, you know, with banks, some will try to go it alone, but will some just gobble up
00:21:07
Speaker
the successful D2C platforms and then therefore just why they're client-based?
00:21:12
Speaker
I mean, I can answer that.
00:21:13
Speaker
So I think there are several battlegrounds for the D2C investor, right?
00:21:19
Speaker
So it goes without saying the banks are definitely one.
00:21:22
Speaker
It's a very much what we call a bank-dominated distribution market when it comes to investments.
00:21:28
Speaker
The UK is obviously not so much.
00:21:30
Speaker
The banks kind of removed themselves from a lot of what they were doing in terms of investment off the back of the financial crisis and off the back of RDR.
00:21:38
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It's almost been a golden age for advisors and it's created that advice gap.
00:21:43
Speaker
So I think
00:21:43
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I think that's one thing.
00:21:44
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The second place I think which is hotting up is workplace.
00:21:47
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The workplace where obviously your pension is being paid.
00:21:51
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You know, and I think we're starting to see, let's just call it the sort of Pentech providers coming in and offering a solution that sits across not just your pension, but also
00:22:00
Speaker
the world management.
00:22:01
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Then I think there's existing DTC platforms, you know, so the very large platforms which have, you know, generally the hobbyist investor or DIY investor have captured.
00:22:09
Speaker
I think the fintechs, you know, are obviously another area.
00:22:12
Speaker
I think they're offering something, you know, kind of innovative.
00:22:16
Speaker
I think they're very flexible in terms of how they move and I definitely think they'll have a say in
00:22:20
Speaker
you know kind of what's going on and then the final place is the non-financial players you know and I think for a long time you know we've seen non-financial players such as supermarkets, department stores, even football clubs dabbling in financial services you know so if you think about certain football clubs they have over a million people with credit cards associated with them and a huge client following globally and so I think it's a combination of probably those different factors
00:22:47
Speaker
plus the fact that the wealth managers are starting to think, you know, actually I probably need to offer something as well in the digital space and it's becoming easier to do.
00:22:55
Speaker
I actually don't think there's one answer and I think the second thing I'd say is that actually it's going to be about collaboration and I think, you know, like a lot of stuff that we've done, you know, within BlackRock has been, you know, take Scalable Capital's capabilities, you know, and help our customer base through that, even though Scalable Capital still have a, you know, a thriving business,
00:23:15
Speaker
in many parts of Germany.
00:23:16
Speaker
So there's going to be both of them.
00:23:18
Speaker
And I think there's such a large market, there's 30 trillion euros sitting in cash, that probably a large part of that doesn't necessarily need to be sitting in cash.
00:23:28
Speaker
There's so much to play for.
00:23:29
Speaker
There's so much opportunity that I think I actually don't think there needs to be necessarily winners and losers.
00:23:37
Speaker
I just think the whole thing will push each other to a greater solution and actually enable people to be financially happier and improve financial well-being across Europe.
00:23:46
Speaker
Some great points there, Joe.
00:23:47
Speaker
Thanks.
00:23:47
Speaker
It's very difficult to have a discussion on ETFs or any investment product for that matter, but I'm mentioning ESG.
The Rise of ESG Investments
00:23:54
Speaker
And certainly I was a big believer that a lot of the allocations into ESG, ETFs and broader investment products is driven by the institutional channels with the DTC market and clearly the high prevalence of retail investors.
00:24:09
Speaker
How much is ESG a factor in their investment allocation decision?
00:24:14
Speaker
Maybe Pacom, open that up to you.
00:24:16
Speaker
Yeah, I mean, the simple word is huge.
00:24:19
Speaker
That's clearly the case.
00:24:21
Speaker
I mean, you see, for us, we launched our ESG offer in 2018.
00:24:26
Speaker
And there were two interesting challenges, even at the time.
00:24:29
Speaker
It's not that long ago, but even at the time, which was the first one was the size of the ETF markets that were available.
00:24:37
Speaker
And the second one was there was still an idea that ESG was a bit designed for stock picking.
00:24:42
Speaker
And so the two of those were a bit some, you know, some question mark on the, you know, just three years ago.
00:24:49
Speaker
And what we've seen since then is clearly the fact that the size of the ETFs in ESG has increased quite dramatically.
00:24:56
Speaker
And it has followed as well a very, very strong interest and increase in our own portfolio of ESG.
00:25:02
Speaker
And so trading those ETFs now is not a challenge anymore because really there has been such a flow of money into the space.
00:25:09
Speaker
that basically it has become really broadly accepted and much easier to manage portfolio of ESG ETFs.
00:25:19
Speaker
And as well, we've seen that actually the passive allocation to ESG has been almost dominant since like we've seen in non-ESG parts somehow.
00:25:29
Speaker
I mean, we've seen recently, for example, in the UK, more than 50% of the flows are to passive and it's the same in ESG.
00:25:36
Speaker
So basically those two challenges that existed are not really there anymore.
00:25:40
Speaker
And so it has been a very good success for us.
00:25:43
Speaker
And we see regarding our investors base, which is quite young, it's really top of their priorities.
00:25:48
Speaker
They want to invest, but they want to invest in an ESG, an SRI compliant manner.
00:25:53
Speaker
And so most of them are actually interested to go that route with us on their investment.
00:25:59
Speaker
2020, clearly COVID, it helped the performance in ESG, right?
00:26:03
Speaker
Probably because of exposure to technology.
00:26:06
Speaker
I think, you know, a significant number of ESG strategies outperformed, benchmarks.
00:26:11
Speaker
We haven't seen that level of outperformance in 2021, right?
00:26:16
Speaker
It's significantly falling back.
00:26:18
Speaker
Yeah.
00:26:19
Speaker
Are retail consumers happy to have underperformance in allocating to ESG?
00:26:26
Speaker
You would be surprised.
00:26:27
Speaker
Well, first, we are very low profile in terms of discussing the performance of ESG.
00:26:32
Speaker
And when we launched our product, we were saying we believe on average there will not be any difference.
00:26:37
Speaker
You're not going to be penalized by investing ESG, but there's no guarantee.
00:26:42
Speaker
And if you outperform for some periods, you might end up performing another period.
00:26:46
Speaker
And you would be surprised.
00:26:47
Speaker
People don't choose ESG or SRI allocation directly.
00:26:50
Speaker
based on performance expectation.
00:26:52
Speaker
They still expect to invest in better companies will end up with better returns, but it's a hope.
00:26:58
Speaker
It's not, they know it's not a guarantee at all and it's not the main criteria to invest in ESG and SRI.
00:27:04
Speaker
People want to invest it because it's what they believe.
00:27:07
Speaker
It's how they want to live their life and it's how they want to see their long-term investments or their pension investing in companies that are aligned with their thinking.
00:27:16
Speaker
So performance is only, I would say, not such a big aspect
00:27:21
Speaker
or smaller than what people could think somehow.
00:27:24
Speaker
So yes, it has outperformed in 2020, a bit less in 2021, but
00:27:30
Speaker
It's not the main point really over the long run.
00:27:33
Speaker
I agree, it's become a non-negotiable.
00:27:34
Speaker
And I think people are thinking, the pandemic's done this as well, people are thinking a lot more around their purpose and their own kind of sustainability in many ways.
00:27:45
Speaker
And I think it's rare that, I don't want to call it a trend because it's not, it's everything.
00:27:52
Speaker
But it's rare that things in the short term,
00:27:55
Speaker
like exceed our expectations.
00:27:57
Speaker
Right.
00:27:57
Speaker
And I think again and again and again, the momentum behind sustainability, ESG investing, you know, thinking through purpose, you know, a lot of things that happened both in the UK and the US and across the globe in and around D&I over the course of 2020.
00:28:15
Speaker
you know, that momentum is just massive.
00:28:17
Speaker
And I think, you know, like, when we went into the pandemic, technology and sustainability was probably like the top two conversations you have at boardroom level across the asset and wealth management industry.
00:28:29
Speaker
You know, now it's definitely technology still there, but sustainability, ESG, D&I, you know, is the real critical thing that's happening at a kind of, you know, within every organisation.
00:28:41
Speaker
What I would add from my side is that
00:28:45
Speaker
This has been an ongoing discussion on sustainability and this trend, clearly, as Joe and Pakum were saying, has been accelerated with the pandemic.
00:28:54
Speaker
We as providers, what we're finding ourselves sort of replicating for the client is also the evolution of the discussion.
00:29:03
Speaker
Initially, the discussion was very much about, like, we don't want to invest in these companies.
00:29:08
Speaker
Then the...
00:29:09
Speaker
It started going into, well, we also need to, there are some companies who are on the cusp, we need to help them improve, get better.
00:29:16
Speaker
Then it started being about particular themes.
00:29:19
Speaker
It started being more about the climate as well.
00:29:22
Speaker
Let's take that into consideration.
00:29:24
Speaker
And I think that's where Steve was also mentioning earlier, the precision of the ETFs, but also the wide diversity and variety of products
00:29:36
Speaker
of aspects, investment themes that you can cover through the ETFs.
00:29:41
Speaker
This evolution as to how investors want to go into sustainability is fully reflected within the industry.
00:29:48
Speaker
And I think what you're going to see more and more, in my view, as some,
00:29:54
Speaker
especially as investors look into it, but also as more and more model portfolios are created around sustainability, is that this precision, let's look exactly at what type of outcome you want to achieve, means that we as providers will probably be launching more products around this and they will be more and more specific to cover one aspect.
00:30:17
Speaker
Retrocessions is a key reason why distributors continue to perform mutual funds versus ETFs, and it's particularly pronounced, I think, Asia.
00:30:25
Speaker
Do we expect this to change anytime soon?
Regulatory Impacts on ETFs in Asia
00:30:29
Speaker
I think that's the $1 million question.
00:30:31
Speaker
I mean, the reality is that in Europe, in the US, the changes were triggered by regulation.
00:30:40
Speaker
And if we look at how the regulators are doing,
00:30:47
Speaker
reacting in the markets, I would say that I expect that you will also eventually see some form of regulatory change, which is going to accelerate sort of a change as to how investors are being charged for their investment, let's put it that way, and for investment advice.
00:31:09
Speaker
And that definitely then will benefit ETFs.
00:31:13
Speaker
Well, I think we're just talking about moving from brokerage to advisory, which is kind of where we used to be in the wealth management space across the globe to fee-based advice or discretionary.
00:31:24
Speaker
You know, and fee-based advice is I'm going to charge you an explicit fee kind of over the top of your investments and the retrocession will be there.
00:31:31
Speaker
Discretionary, you know, which is kind of what a lot of digital wealth managers do.
00:31:35
Speaker
So I just think it will be a change in the business model we're seeing initially in the US, then came to the UK, then going across Europe.
00:31:43
Speaker
And whether that happens in Asia, it might be regulatory led, but a lot of the firms operating in Asia are global in nature and continues around two different business models across different countries is really difficult to do, especially when clients are quite fungible across these different regions.
00:32:04
Speaker
So I think over time you'll end up in a situation where you kind of end up not necessarily using retrocessions, but the fee-based advice or the discretionary model will be the model that seems to win through.
00:32:15
Speaker
Historically, D2C platforms have struggled with ETF trading on legacy IT architecture with the increase in demand for ETFs and number of investors moving to digital wealth.
00:32:24
Speaker
How ready are D2C platforms to scale up operationally and with technology?
00:32:30
Speaker
And how much will this rely on outsourcing, using outsourced technology solutions?
D2C Platforms and ETF Trading Readiness
00:32:36
Speaker
I can get this one.
00:32:37
Speaker
And Steve, if you want to add something.
00:32:40
Speaker
I mean, for us, I think we were the first one in Europe to offer a split ETF.
00:32:44
Speaker
So we're splitting the ETF for clients so they can invest in only one part of an ETF.
00:32:50
Speaker
We do all our trading online.
00:32:52
Speaker
It's all OTC as well, where the spreads are very, very tight.
00:32:59
Speaker
And so, yes, we started with a new technology.
00:33:02
Speaker
I mean, that's why that was good.
00:33:03
Speaker
I can't really comment for others.
00:33:05
Speaker
But yes, on our side, the ability to execute at extremely low cost and very efficiently our portfolios of ETF is absolutely fantastic.
00:33:17
Speaker
And we have absolutely no problem on that front.
00:33:19
Speaker
So maybe others have some IT legacy.
00:33:22
Speaker
But on our side, clearly, we're not seeing that.
00:33:25
Speaker
Yeah, I guess just to add, I think the beauty of the ETF is it trades like a share.
00:33:30
Speaker
So the transparency that you can get through execution is strong and the competition that you can have when executing.
00:33:36
Speaker
One of the things that we're working on, HSBC actually, is an algorithm as well.
00:33:40
Speaker
So we're constantly trying to innovate and create new ways to deliver best execution to our clients.
00:33:46
Speaker
So we think algorithm execution works.
00:33:48
Speaker
will hopefully be another step forward in terms of how clients can actually purchase and sell their ETS on exchange as well.
00:33:55
Speaker
So there's lots of things and work that we're doing again, down to that specialization of the skill sets.
00:34:01
Speaker
But yeah, there's lots of work that we're doing.
00:34:02
Speaker
But I think the best execution, the transparency you get through ETF executions is there.
00:34:07
Speaker
It's clear there's a significant opportunity across D2C channels
00:34:12
Speaker
you know, there's universal accelerations across geographies regions.
00:34:15
Speaker
And from listening to the panelists today, I think if you don't have a digital strategy when it comes to ETFs, you don't have a strategy.
00:34:21
Speaker
So I'd like to thank you panelists for all of your insights and thank you listeners.
00:34:28
Speaker
This has been the Markets and Securities Services Outlook, a podcast miniseries produced especially for HSBC Global Viewpoint.
00:34:36
Speaker
To learn more about HSBC's Markets and Securities Services offerings, visit
00:34:42
Speaker
gbm.hsbc.com forward slash solutions forward slash securities dash services.
00:34:53
Speaker
Thank you for listening today.
Conclusion and Call to Action
00:34:55
Speaker
This has been HSBC Global Viewpoint Banking and Markets.
00:34:59
Speaker
For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.