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RIAs Now the Biggest Driver of ETF Asset Growth: Broadridge

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RIAs are the biggest single driving force behind the growth of ETFs and, together with broker-dealers, account for almost half the $2.6 trillion in U.S. ETF assets, according to Broadridge.

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Its fourth quarter 2016 Fund Distribution Intelligence report shows that RIAs were overseeing almost $700 billion in ETF assets by the end of last year while independent B/Ds were responsible for $514 billion.

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“It used to be that institutional investors were driving the growth of passive investments. Now advisors moving to fee-based low-fee products within portfolios are responsible,” says Frank Polefrone, senior vice president of product development at Access Data, the data analytics group at Broadridge. “Robos are a big part of this.”

For all of 2016, net new assets of ETFs rose by $405 billion, up 18.4% from the previous year. RIAs were responsible for just over one-quarter of those money flows, or $116 billion, which were up 20% from the previous year.

— (Related on ThinkAdvisor: Active Managers’ Struggle to Maintain Assets)

Total flows into passive assets – including index mutual funds – from third party channels rose 20% to $610.7 billion in 2016, while flows into active assets increased less than 2%, or $113.2 billion.

Retail channels were responsible for two-thirds of the flows into passive assets; institutional channels accounted for the rest.

“There is a fundamental shift in how people invest and how advisors are pricing their business, and both are accelerating,” says Polefrone.

Investing in low-fee products, such as ETFs and index mutual funds, leaves more money as compensation for advisors who can then focus on servicing investors in other ways, including financial planning.

The use of passive investment products – ETFs and index mutual funds – hit a record high in 2016, driven by third-party sales from broker-dealers, RIAs and banks, which together account for  65% of the $10.5 trillion of long term funds and ETF assets tracked by Broadridge. The RIA channel is the largest passive retail channel with total with total assets, in funds and ETFs, of $2.3 trillion.

By year-end 2016 those passive investments, which also include smart beta ETFs, accounted for 36.3% of assets managed by third-party channels, up from 32.6% a year earlier, and more than the 30% of passive assets across all funds, excluding money markets.

Polefrone expects the trend toward passive will continue among third-party channels, including RIAs, no matter what happens to the DOL fiduciary rule, which requires that advisors act in the best interest of their clients and which appears to favor lower fee products like passive ETFs and index mutual funds.

“It’s a runaway train,” says Polefrone. “The RIA channel had been adopting this approach to passive long before other channels,” said Polefrone. “Now independent broker-dealers are playing a bit of catch-up.”

Despite the growing popularity of passive funds, Polefrone doesn’t expect their total assets will overtake actively managed assets anytime soon, but he says an even split is possible among third-party channels in a few years since the share of passive assets among those channels, now 36.3%, has been growing by roughly two to three percentage points every year.

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