Advisors say financial stability, integrity and honesty are crucial for mutual fund providers.

Market Strategies International recently published its sixth annual Advisor Brandscape report, finding that although advisors reported improved brand impressions for many product providers, they’re still working with only a select few.

Meredith Lloyd Rice, a senior director for MSI’s syndicated division, said the favorable views could be attributed at least in part to stronger market performance.

“We’re seeing increases [in brand impressions] across the board for a lot of providers, but the interesting thing is even though the impression scores are rising across the board, we’re still seeing a relatively more narrow list of firms rising to the top,” Rice told ThinkAdvisor on Monday.

She added that advisors were “concentrating more on the primary provider now, working with fewer providers. It’s interesting because a lot of firms are benefiting from the strong market performance, but at the same time I think with the rise in performance, now there might not be as much focus on cobbling together the absolute best-in-class provider in every asset class. It’s going to be a little more concentrated in some of the bigger firms.”

The most important criteria for mutual fund providers, “probably not surprisingly,” Rice said, “is having a distinctive company investment philosophy and also having strong long-term and consistent performance.” However, advisors are also concerned with what MSI calls “table stakes”: financial stability, integrity and honesty. “If a firm doesn’t perform well on those attributes, it’s a potential risk,” Rice said.

Furthermore, although not all advisors take advantage of the value add programs their providers offer, those programs were most likely to enhance loyalty to a firm among those who do, Rice said.

The Advisor Brandscape report aims to provide insight into advisors’ evolving needs, including perceptions of product providers.

The report also tracks how advisors use different asset classes and found they are gravitating toward less traditional asset classes and strategies to look for higher yield, Rice said. “They anticipated increasing their exposure to non-U.S. equities, emerging markets and alternative investments, and dialing back their exposure to U.S. fixed income and cash over the next two years. I think that’s attributable to the current continued low interest rate environment.”

Advisors are increasingly using managed money solutions, according to the report, but Rice noted that that there’s a disconnect between advisors who want to use those solutions to make more time for their clients, but don’t want to hand over too much control.

“The interesting challenge there is there’s a bit of a disconnect in terms of advisors really relying on the money managed solutions to free them up to spend more time focusing on clients and to scale their practices, but at the same time they have the same expectation in terms of wholesaler visits and contact and communication from the providers that they’re working with,” she said. “Not all of them like the restrictions that their firm may be placing on them to only work with firms on the recommended list.”

Three out of four advisors said they thought they should be able to access any mutual fund or ETF that they wanted, she added. “Even though they’re relying at least to some degree on the managed money solutions, there are maybe some misgivings related to the potential lack of flexibility.”

She added, “I think the heavy users see many of the benefits of using these models, but for some of the more light and moderate users, they still want to be able to feel that they can access the best product for their clients.”

Advisors’ allocations to mutual funds have held steady, Rice said, despite an earlier prediction that they would dial back those allocations.

“We actually saw them remain pretty flat and they plan to maintain them over the next year, which we were thinking could partly be due to the strong market performance over the past year,” Rice said. However, “we did see a pause in advisors’ ETF use.” Although there has been “tremendous growth” in ETFs since 2007, the percentage of advisors using them fell from 73% in the 2013 report to 68%.

Rice noted that they still predict strong growth in ETFs over the next few years, especially in rules-based and smart-beta products.

Advisors are allocating new dollars fairly evenly between mutual funds and ETFs, the report found, but Rice said they’re also “anticipating allocating a pretty large chunk to individual securities as well. It does seem like with the low interest rate environment, the hunt is on for income solutions, so we were thinking with individual securities, they could be seeking dividends.”

She added, “The fact that they’re looking at individual securities makes you wonder if there’s a gap there providers could be filling better because it is so time intensive for advisors to research all these individual stocks.”

Another interesting trend identified in the report, according to Rice, is the leveling off of fee-based compensation. “Last year we saw this big shift toward a significant increase [in the] proportion of compensation that was derived from asset-based fees,” she said. “This year we saw that there was no further movement toward fee-based compensation. We’re still seeing it up compared to where it was a few years ago, but that shift has leveled off for the moment.”

She suggested that might be due to the aging of advisors’ client base. “The majority of advisors’ clients are age 55 and older,” she said. “They’re focused on retirement. Clients are probably keeping a really close eye on fees and the impact on investment performance, so they might be thinking about what makes sense for a specific client’s situation.”

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