For providers of these products and others, getting to registered investment advisors requires more Mapquest, more local manners and more frequent flying than their Morgan, Merrill,, UBS and Wells Fargo cousins

May 22, 2014 — 6:34 PM UTC by Guest Columnist Frank Polefrone

2 Comments

Brooke’s Note: Broadridge sent me a white paper a little while back that made me do a double take. It had put hard numbers on what we talk about all the time but mostly based on anecdotal evidence — that RIAs are kicking wirehouse butt. It’s not just in terms of a dubious and extrapolated growth rate but in absolute terms. I asked if they could take their findings and put it into column that even an RIA could appreciate. I think Frank Polefrone has done an admirable job of that here.

Providers of exchange traded funds must adapt their sales and marketing strategies to reflect the rapid growth in distribution through fee-based registered investment advisors. See: Relentless TD Ameritrade antes up a killer ETF platform.

ETF assets under management in the RIA channel have grown by more than 62% since 2011 from $217 billion to $362 billion. In the first quarter of 2014, RIAs had $364 billion of ETF assets under management, surpassing the top four wirehouses’ total of $311 billion, according to Access Data, a Broadridge company. See: Fidelity and BlackRock are cooking up a (de facto) de novo ETF company deep in the Rockies.

Channel shift

This dramatic shift in distribution leadership complicates sales and marketing efforts because RIAs tend to be smaller units with diverse structures — ranging from single-person operations to large teams. See: How RIAs are forcing mutual fund wholesalers to lead or get out of the way.

In total, the RIA channel for ETFs and long-term mutual funds (i.e. the universe of all mutual fund assets minus money market funds) was $1.67 trillion at the end of the first quarter, surpassing the total gathered by the top four wirehouses: Merrill Lynch & Co., Morgan Stanley, Wells Fargo and UBS.

RIAs now have more mutual fund assets under management than do the top four wirehouses, and the growth trends for both ETFs and mutual funds appear to be continuing in that distribution direction. In the first quarter, assets for the RIA channel increased by $68 billion, versus an increase of $38 billion for the wirehouse channel.

During 2012 and 2013, the RIA channel grew more evenly between long-term mutual funds, which represent 59% of new assets, and ETFs, which represent 41% of new assets. The wirehouse channel, on the other hand, depended on long-term mutual funds, which represent 73% of its new assets. See: Why many RIAs should start a mutual fund, considering the limitations of SMAs.

Too many to call on

While it is encouraging that a broader base of advisors is using ETFs, the RIA channel provides some significant challenges. The four main wirehouses offer a more centralized points of contact for their approximately 57,000 advisors, while the RIA channel is more diverse with a similar number of advisors spread among its 14,000 larger firms. For example, small RIAs with less than $100 million in assets under advisement represent about 50% of all RIA firms. Medium-sized RIAs, with $100 million to $1 billion, represent 36% of all RIA firms. Large RIAs, with $1 billion to $2.5 billion in assets, represent only 5%. See: How two deals struck last week show midsize RIAs reigniting the M&A and breakaway movements.

At first glance, it might appear that small practices are a good target, when in fact they only represent 14% of the RIA channel’s total assets. This affects ETF providers’ distribution options — for example, visiting each RIA in person could be prohibitively expensive; a telemarketing operation could be a better approach.

The medium-sized RIA segment, by contrast, has a high usage of mutual funds (33% of assets) and ETFs (19% of assets), and represents the largest percentage of overall RIA assets (38%). These RIAs with $100 million to $1 billion also represent the largest upside for growth in terms of overall asset opportunity (i.e. assets not yet invested in mutual funds or ETFs).

Custodians, fund choice and sales

After ETF providers identify the most attractive segment of the RIA channel they need to consider three questions as they build their sales and marketing plans.

First, how will RIAs learn about and access their products? The key to this is to understand the relationships between RIAs and their custodians. Custodians offer RIAs a range of essential services, which has boosted the growth of the channel over the last few years. In some cases the type of business the RIA conducts may drive the selection of a custodian, which is useful to know when determining which custodians to target. See: A peek inside the rising RIA custodians fighting to overtake the Big Four.

Second, ETF and fund providers should determine how a particular RIA operates so they can offer appropriate products. For example, these companies should understand the type of accounts the RIAs manage, whether these are discretionary or non-discretionary, whether they use actively managed products, and what types of products (ETFs, funds, etc.) they prefer. Historical data confirms that RIAs place emphasis on their discretionary role and will easily move in and out of products based on the performance of the funds, as well as expectations of where the market may be headed. See: 11 steps to becoming an RIA without upsetting Merrill Lynch, the SEC or your clients.

Third, providers need to align their sales and marketing resources with the size of the opportunity. Determining the appropriate size for a territorial sales team, spreading the best opportunities evenly among the sales teams, and setting realistic targets based on the size and characteristics of the target segment will help to ensure that resources are allocated in a way that maximizes profitability. See: Fidelity is shopping for new head of sales after Scott Dell’Orfano is tapped for semi-secret mission.

Sales managers can also get a true measure of how sales are progressing by analyzing their sales teams’ success by territory and market segment versus the ETF market overall. They can also get a better picture of growth by product type across the different regions.

Worth the effort

These considerations will be increasingly important in coming years if, as it appears likely, the RIA sales channel continues to outpace the wirehouse rate of growth. ETF distribution strategists will have a harder time analyzing and reaching the RIA community than they do pitching to a handful of wirehouses today; and effective distribution will increasingly require quality data and advanced analytics. See: RIA custodians charge steep new ETF-related fees that can range into the tens of thousands of dollars for big trades and advisors are working to deal with them .
But given the growth trends in ETF assets, it will be worth the effort.

Frank Polefrone is the senior vice president, Access Data, a company owned by Broadridge Financial Solutions.


Mentioned in this article:

Forefield, a division of Broadridge Financial Solutions
Financial Planning Software
Top Executive: Brent Delehey



Share your thoughts and opinions with the author or other readers.

Gravatar

ROB said:

December 31, 2014 — 11:59 AM UTC

This clown Frank is not to be believed. Their data is wrong, it does not update, it is a fraud for which they are overcharging. It is time someone speaks up. Not to mention I showed him how to write on this topic, he stole my idea and now he writes a report on his own. Too bad, because their data is poor, and his heart is not into it.

As an asset manager, I will never pay him and Broadridge a cent of my money.

Gravatar

Craig Iskowitz said:

February 24, 2015 — 9:37 PM UTC

I’ve seen this data confirmed from other sources. RIA’s are surpassing Wirehouses in distribution of ETFs. This is due to the many benefits that ETF’s can provide to RIA’s, including: – liquidity – diversification – exposure to and mitigation of risk – access to a wide variety of assets – access to a variety of investment strategies beyond passive indices
These and other topics were covered in an interesting panel discussion at the
recent MMI Convention. You can read the entire article for free here: http://wmtoday.com/?p=4074


Submit your comments: