Growth of ETFs Cuts Into Advisor Use of Outside Asset Managers: Cerulli

Boston-based Cerulli expects independent channels to gain between 1% and 2% market share annually over coming years

A new report by Cerulli Associates has found that advisors are using fewer asset managers in their practices—with the growth of ETFs contributing to this trend.

Cerulli says that its latest report, "Advisor Portfolio Construction Dynamics," examines how advisors are building investment portfolios for their clients and the impact this is having on firms targeting these advisors.

The report also found that while the overall number of advisors has remained relatively stable, “their allotment among distribution channels has changed a bit as independent channels--IBD, RIA, and dually registered--have grown at the expense of the historically employee-focused channels.”

Cerulli also notes in its study that the Boston-based firm expects independent channels to gain “between 1% and 2% market share annually over coming years as experienced advisors continue to migrate towards independence.”

In 2008, just 37% of advisors reported regularly using five or fewer asset managers, but by 2011, this number increased to 57%, notes Scott Smith, head of Cerulli’s intermediary practice and lead author of the research, in a statement. “Despite the proliferation of new products and providers, over the last several years, we have documented the extent to which advisors are using fewer asset managers,” he says.

Cerulli cites several factors that have contributed to the dwindling use of asset managers. First, some advisors fear the risks of dealing with many providers because each new manager brings with it potential issues. For example, Cerulli says, “if a manager’s name ends up in a negative headline, it could cause concern for clients.”

However, Cerulli notes that “once an advisor believes in a manager’s people and process, they can be more willing to broaden their relationship, creating attractive asset-gathering opportunities for managers.”

Another factor contributing to advisors’ use of fewer asset managers is the growth of ETFs. “A single manager can provide coverage of several asset classes within an ETF structure. While use of passive products has not pushed aside traditional active products, advisors are willing to consider them to address specific needs or to serve as complements to active products,” Cerulli says.

What’s more, Cerulli says that advisors anticipate increasing the percentage of clients who receive what advisors consider “comprehensive financial planning” from a third of clients to nearly half. However, Cerulli says it believes “the more likely scenario is that advisors will balance their interest in expanding relationships with the nearly universal interest in exploring the path of least resistance, resulting in an increase in modular planning and advice.”

As of 2003, only 46% of advisors reported receiving a majority of their revenue from advisory fees, Cerulli states. But by 2010, just over 66% of advisors reported a majority of their revenue in the form of advisory fees. “Moves to fee-based advisory accounts generally serve to streamline an advisor’s practice as technology solutions have simplified ongoing fee-account management,” says Cerulli.

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