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RIAs added half a trillion in assets to ETFs in a recent 12-month period, far outpacing wirehouse brokers
August 27, 2015 — 8:37 PM UTC by Lisa Shidler and Brooke Southall
Brooke’s Note: These Broadridge findings about RIAs, ETFs and mutual funds should not surprise people who write about RIAs for a living. But my eyes were opened by the data showing the degree to which the destinies of the hottest channel, RIAs, and the hottest product category, ETFs, are tied, not just on a relative basis but on an absolute basis. Also surprising is the degree to which the future of the mutual fund industry depends on RIAs as wirehouses remain platforms for selling SMAs and annuities. Smaller RIAs find much to love about mutual funds.
RIAs with $500 million and up in managed assets are the master buyers of exchange traded funds — directing far more dollars to them than individual investors, wirehouses or institutions.
RIAs invested $496 billion in ETFs in the 12-month period ended June 30, a $78 billion increase compared to the same period last year. The wirehouse channel added 20% fewer ETF assets or $397 billion, albeit an amount that was $70 billion greater than its aggregate investment during the same 12-month period a year before, according to Broadridge Financial Solutions Inc. based in Lake Success, N.Y. See: How RIAs are forcing mutual fund wholesalers to lead or get out of the way.
Retail distribution channels generated more than 87% of ETF asset growth during that fiscal year, according to data released from Broadridge, which processes more than $5 trillion in fixed income and equity trades per day. See: Fleet-footed RIAs storm into the active ETF market as fund giants tie pretzel dough.
But not all RIAs add to these totals proportionally.
“The largest holders of ETFs are RIAs with $500 million of ETF assets,” reads a statement from Broadridge. “The growth of ETFs in the RIA channel continues to outpace all other distribution channels, and the product type driving this growth over the past year was equity products, representing 88% of the net increase in ETF assets.”
This point about ties between fee-based advisors and ETFs was seconded by Barron’s in its Why BlackRock Is a Buy article on Saturday.
“All signs point to continued brisk growth for low-fee investing. In the U.S., regulators are mulling new restrictions on financial advisors that could cause more of them to drop commission sales in favor of fee-based advice—a model that favors cheap ETFs.”
RIAs and ETFs are naturally compatible — largely because RIAs are winning market share from all the other channels, according to Frank Polefrone, senior vice president of Broadridge’s access data product suite, in an email.
“RIAs are growing assets they manage at a faster rate than all other channels, especially the wirehouse channel. RIAs are utilizing lower-fee products index funds and ETFs in a bigger way. ETFs are an efficient way to allocate assets and RIAs are constructing portfolios for their clients and ETFs make it easy to get exposure to broad asset categories.” See: Why most RIAs bent on launching in-house ETFs should swallow hard and start a mutual fund.
Fixed-income ETFs represented 15% of the net increase in the last year; commodity ETF assets showed a 4% net decline in assets over the same period. Other categories, include liquid alternatives and allocation funds showed essentially no change in overall assets within the RIA channel over the past year.
The RIA channel also outpaced all other channels for combined ETF and mutual fund asset growth during the three months ended June 30, and grew at a rate of two times that of other retail channels — even the $200 billion in mutual fund assets, excluding money market funds, distributed by retail channels. The combined ETFs and mutual fund asset increase of $208 billion attributable to RIAs during that second-quarter period was more than one-and-a-half times that of other retail channels.
Easy and cheap
ETFs are valuable to RIAs because they manage portfolios and in most cases are making discretionary investment choices for their clients, Polefrone explains. ETFs provide RIAs easy access to market segments at a cheap price, which is especially important to RIAs who are compensated on an asset-fee basis. See: One-Man Think Tank: A method for analyzing and comparing the costs and fees for mutual funds and ETFs.
Larger RIAs favor ETFs more so than those RIAs that manage fewer assets. Polefrone explains that his firm’s data shows that RIAs that manage $500 million or more in assets are likely to use a wider selection of products, including ETFs and mutual funds. In many cases, smaller RIAs tend to be less likely to build asset allocation portfolios in house and rely more on mutual funds. See: Why ETF sponsors are ponying up big fees to get on Schwab’s ETF OneSource in a bid for access to ticket-averse RIAs.
That said, RIAs are also in the lead when it comes to investing in mutual funds, as opposed to wirehouses, which rely more heavily on separately managed accounts, according to Polefrone.
“In short, if the pricing and performance are correct, RIAs will use a combination of funds and ETFs,” he says.
More and more, RIAs are using ETFs for large-equity positions, especially U.S. equity funds, according to Broadridge, which employs approximately 6,700 full-time associates in 14 countries.
“Almost all of the increase in ETF assets this year has come from retail distribution channels sold by advisors from RIAs and broker-dealers,” writes Polefrone.
But wirehouses are still very much interested in ETFs, Polefrone says, and are using more ETFs though not as much as RIAs. The increase usage has come as more and more wirehouse advisors offer investment models and managed accounts that include ETFs.” See: How DFA is putting its John Hancock on the ETFs category.
RIAs’ appetite for ETFs shows no signs of being sated anytime soon — for business, ethical and regulatory reasons..
“As advisors move to fee based compensation, the fees of the underlying products used in the portfolios they manage becomes more important, and under more scrutiny. We see increased usage of index funds, ETFs and institutionally priced actively managed funds in the RIA channel,” says Polefrone. 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 .
Mentioned in this article:
Forefield, a division of Broadridge Financial Solutions
Financial Planning Software
Top Executive: Brent Delehey
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