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Q&A with Industry Veteran Brian O’Donnell on ETF Distribution

This article was originally published on ETFTrends.com.

Q&A with Industry Veteran Brian O’Donnell on ETF Distribution

In an ETF industry that’s grown exponentially over the past decade, strong leadership is a must-have, especially when it comes to differentiating oneself from the masses of product offerings available in the marketplace. That’s exactly what financial industry veteran Brian O’Donnell brought with him when he joined Northern Trust Asset Management as Head of Business Strategy, Enablement and Administration for the Funds and Managed Accounts Group, including its FlexShares suite of ETFs.

In O’Donnell’s new role, he will be responsible for developing business strategies that cater to the firm’s ETF, mutual fund, and multi-asset class investment solutions, as well as business intelligence, to optimize its service model for both intermediary and institutional investors.

O’Donnell’s 20-plus years of experience includes a stretch at BlackRock, where he was Head of Americas Cash & Liquidity Sales and Distribution. In his role at BlackRock, O’Donnell oversaw a team responsible for the firm’s global liquidity business across all client channels. Furthermore, O’Donnell led BlackRock’s mutual fund and iShares ETF business development for the RIA channel, and orchestrated the development and implementation of iShares’ distribution strategy for the Asia Pacific market.

O’Donnell’s global experience and leadership presents a strong fit with Northern Trust Asset Management given that it has an investor base located in 29 countries across the globe and over $970 billion in assets under management.

Brian was able to speak with the ETF Trends team to discuss his new role and offer his insight on an ever-changing financial industry, especially in the ETF space.

You left the largest ETF manager in the world and now you’ve joined Northern Trust Asset Management. What prompted the move?

I’m grateful for the 16 plus years spent with BlackRock and Barclays Global Investors, particularly how much fun it was in the very early days from 2001 to 2010, with the explosive growth of iShares. There are several reasons I chose to join Northern Trust Asset Management. Extremely compelling to me are the five values that define the culture within the firm—passion for investing, high competency, intellectual curiosity, diversity of thought and humility. Of particular note, humility manifests itself in everyone being extremely respectful of not only clients, but of one another.

The second strong attraction was the firm’s priorities, which speak to where the industry is headed.  I’m referring to an expansion of our client franchise by identifying opportunities in new as well as current markets and segments—that’s exciting to me. And with so much of that opportunity being in quantitative investment strategies, Northern Trust Asset Management is positioned extremely well given our expertise in factor investing for which we bring nearly 25 years of experience to the table.

Northern Trust Asset Management and FlexShares are committed to offering predictable outcomes and compensating our clients for the risk they take in their portfolios. Our FlexShares ETFs continue to be a strategic priority of the firm and have a perfectly fitting tagline of “built by investors, for investors” since each and every fund is designed by our investment professionals to meet fundamental investor objectives.

Multi-asset and digital solutions are two other strategic priorities that also resonate very highly with me. We’ve all seen the growth of those areas in the industry and the way that Northern Trust Asset Management is positioned to deliver on them is very appealing to me.

Finally, the opportunity to be the head of business strategy for our funds, managed accounts and ETF business is a real privilege, as I’m fortunate to contribute to the continued success of a world class organization with a 129-year track record for service, expertise and integrity. It’s a pretty exciting role.

In an ETF industry that’s dominated by three industry giants, how does a firm like Northern Trust Asset Management differentiate its FlexShares ETFs?

What’s most exciting to me about FlexShares is the innovative and entrepreneurial culture that has been the inspiration for our 26 outcome-oriented ETFs. This truly differentiates us.

If you think about some of the challenges that a lot of ETF providers face, especially with the big three dominating a lot of the flows, products, etc. credibility and scale are certainly front and center for new entrants. And for those firms with legacy active mutual fund complexes and distribution models, prioritization can be a major challenge. The nice thing about Northern Trust Asset Management is we have the credibility and scale that has helped us to grow the FlexShares franchise.

As it relates to being innovative, FlexShares was one of the first ETF sponsors to introduce a multi-factor equity fund-- FlexShares Morningstar US Market Factors Tilt ETF (TILT) . We continue to innovate; we just launched the FlexShares High Yield Value-Scored Bond Fund (HYGV) , which brings to the market a renewed focus on yield by maximizing the value factor to enhance total return potential. FlexShares’ research and testing has revealed that an allocation above the market weighted index to value contributes meaningfully to performance and alpha generation. So we’re continuing to innovate and remain focused on outcome orientation.

Advisors clearly find our approach attractive, as FlexShares  has achieved sizeable growth,  reaching over $15 billion in assets since its 2011 inception. In only seven years, we have become the 12 th largest sponsor in the U.S. and rank 24 th worldwide, so we’re excited about the trajectory of the business.

Active versus passive management: what does the future hold for each in the ETF space?

Our perspective is that there’s certainly room for both. As it relates to Northern Trust Asset Management and FlexShares, our philosophy is rooted in the belief that investors should be compensated for the risk they take in all markets and with any investment strategy. At the heart of that philosophy is how we think, view and analyze risk to ensure that we’re risk-aware investors when risk is taken intentionally. And, again, FlexShares strives to achieve investment outcomes or goals that investors’ desire, which is the most important thing.

We’ve translated this outcome-oriented focus into four areas—capital appreciation, risk management, income generation, and liquidity management—all delivered through passive or active strategies.

To what degree do multi-asset class model portfolios with ETFs present distribution opportunities?

It’s a very large and fast-growing area of the industry and its’ a critical area of growth for Northern Trust Asset Management. The way we see it is our managed account solutions are designed to combine our asset allocation and portfolio construction expertise with our cost-effective FlexShares ETFs. Northern Trust Asset Management offers a Goal Engineer Series of model portfolios, which are based on time horizons, similar to target-date funds.  We also offer Diversified Strategist Portfolios, which target five different investment objectives, from income to maximum growth. In addition, advisors who wish to create their own model portfolios using FlexShares funds of their own choosing, can follow FlexShares Strategic Models that have recently been created. They target the same five investment objectives as the Diversified Strategist Portfolios, from income to maximum growth.

The way we’re differentiating ourselves is that we’re utilizing a multi-factor approach with an emphasis on quality -- and that’s unique. We’re seeing a lot demand for this in the marketplace with platforms and other areas that are adding multi-asset class ETF solutions and making them available to advisors and clients.

What do you see are the biggest distribution challenges for the ETF industry?

I think it’s a couple of things: One, the proliferation of ETFs and the growth in the expansion of providers. It’s really nothing new. The ongoing challenge is how ETF providers differentiate themselves—that’s not going to change.

Another challenge becoming even more difficult is getting access to advisors through platforms and gatekeepers; which is why so many providers are focused on their national and strategic accounts strategy. If you look at a lot of the new ETF issuers, they’re either new to asset management in general or they’re connected to a large legacy active mutual fund complex, which pose specific challenges which we discussed earlier. For new entrants, its credibility and scale that will be their challenge. For the large legacy active mutual fund shops that are getting into the ETF space, it's prioritization and identity.

As I noted earlier, Northern Trust Asset Management has the credibility and scale in that we manage over $970 billion and are the 16 th largest asset management firm in the world. We have diverse insights and scale as well as distinctive solutions that we provide to our clients already. This has helped FlexShares establish a strong brand and again, we’ve amassed over $15 billion since our inception in 2011, a fairly quick rate of growth relative to our competition.

Where do you see the most opportunity: the intermediary or institutional channel?

We see opportunity in both. More specifically, there’s opportunity for FlexShares across a broad array of investors. The distinction is how each of those clients decides to implement ETFs in portfolios. One of the reasons I joined Northern Trust Asset Management was because of my experience with institutional asset managers’ use of ETFs.

What we’re seeing in the institutional space is increasing demand for some of the more targeted products. For FlexShares, we’re seeing demand for FlexShares Morningstar® Global Upstream Natural Resources Index Fund (GUNR) , FlexShares STOXX® Global Broad Infrastructure Index Fund (NFRA) and also our FlexShares Global Quality Real Estate Index Fund (GQRE) . Institutional investors, consultants, insurance companies, pensions, foundations, endowments and family offices are looking at these products for real asset exposure in a liquid vehicle. We’re also seeing demand in factor fixed-income or more specifically, our FlexShares High Yield Value-Scored Bond Index Fund (HYGV) .

Factor investing with ETFs has been gaining increased interest among advisors. What do you attribute this to and how is FlexShares positioned for this latest development?

What we are seeing is growth on multiple levels including in terms of products, distribution and advisor acceptance of factor-based ETFs. This growth is across the board including retail investors, advisors, intermediaries, platforms and institutional investors. The other thing that we’re seeing is more adoption of factor-based strategies in multi-asset class solutions and models which will act as drivers for continued growth of factor ETFs in terms of numbers of products and assets. FlexShares is well-positioned to benefit from this trend as we tap into the nearly 25 years of factor and quantitative investing expertise at Northern Trust Asset Management; we were a true pioneer in the field. It’s going to continue to be an area of growth not only for us, but the industry as a whole.

Any closing comments?

Northern Trust Asset Management is going to continue to innovate by providing outcome-oriented solutions for our clients, including through quantitative or factor investing and FlexShares. I’m excited to help expand our presence in both the individual and institutional markets.