New research by Cerulli Associates finds that ETF growth among advisors is greatest among advisors in three channels: wirehouses, RIAs, and dually registered.
Advisors in these channels, Cerulli notes in its Fourth Quarter edition of its Cerulli Edge newsletter, tend to cater to high-net-worth clients and thus maintain higher books of business. As such, Cerulli says that on an asset-weighted basis, ETF allocations have grown and now account for 4% of advisor-sold assets, compared to 2.8% in 2007.
Advisors use ETFs for various reasons, and Cerulli notes that “examining the motivation for ETF purchases can help illuminate the distribution opportunity for an asset manager.” For instance, wirehouse advisors tend to use ETFs to access to market sectors, and to pair active and passive strategies together, Cerulli says. RIA and dually registered advisors, on the other hand, use ETFs for their cost benefits and their belief in passive management and indexing.
Wirehouse advisors, Cerulli says, “tend to be devotees of active management, and the long history of stock picking still permeates their psyches. In fact, only 13% of wirehouse advisors doubt that active managers can outperform the stock market.” As such, the reasons wirehouse advisors use passive investments, such as ETFs, Cerulli continues, “center around the ability to access market sectors and to pair active and passive management together.” In addition, “the cache surrounding ETFs” attracts wirehouse advisors.
RIAs and dually registered advisors, on the other hand, tend to use ETFs “because of their lower cost. RIAs in particular tend to be extremely price-sensitive. They rely on asset-based fees as their primary method of charging clients for services.” Since these fees tend to run around 1% of assets under management, Cerulli says, “RIAs choose low-cost underlying investments to keep the clients’ all-in fee at a reasonable level.” It’s worth noting, Cerulli adds, that the same finding “applies to managed account programs at broker-dealers, in which ETFs are popular choices for advisors who prefer lower-cost vehicles for accounts with asset-based fees.”