Vanguard Personal Advisor Services reportedly exceeded $50 billion in assets by the end of 2016. (Photo: AP)

Vanguard and Charles Schwab, the leading fully integrated product and distribution firms, experienced organic asset growth of more than 10% in the year to March 31, compared with all other firms, which had a combined organic growth of 2%, according to Broadridge Financial Solutions.

Broadridge’s Fund Distribution Intelligence showed that firms with diversified and fully integrated product and distribution platforms are dominating asset gathering.

“A diversified product mix — index funds, ETFs and actively managed funds — combined with digital distribution in the form of robo-advice is a wining hand today, and gaining momentum,” Frank Polefrone, senior vice president of Broadridge’s data and analytics business, said in a statement.

“More and more firms are following this model of diversification, whether it is traditional distributors such as Edward Jones and Raymond James entering the asset management business, or asset managers such as Blackrock and T. Rowe Price establishing robo-advisor platforms. The move to a fully integrated approach of asset management, distribution and advice seems to be underway among large financial services firms.”

Raymond James Financial recently announced it was buying Scout Investments and its Reams Asset Management division.

Broadridge’s data showed that direct online (formerly referred to as “discount brokerage”) was the fastest growing channel on a percentage basis for the last 12 months. 

Propelled by the success of Vanguard’s Personal Advisor Services and Charles Schwab’s Intelligent Portfolios, the online channel’s overall assets have skyrocketed by 61% in the past year, with ETF and mutual fund growth up 36% and 76%, respectively. 

Broadridge noted that Schwab had recently reported that its two-year-old Intelligent Portfolios grew to $16 billion, while Vanguard’s Personal Advisor Services reportedly exceeded $50 billion in assets by the end of 2016.

Growth Surges

The online channel currently accounts for some $500 billion in overall assets, according to Broadridge. In the first quarter, net new asset growth increased by $39 billion, or 8.6%. 

The new data showed that online channel growth exceeded that of the independent and wirehouse broker-dealer channels on both a percentage and net-new-dollars basis in the first quarter of 2017, and was slightly behind the RIA channel, which had net new assets of $52 billion.

Passive products — index funds and ETFs — accounted for the majority of growth for both the RIA and the online channels.   

Broadridge said the right mix of passive and active products was also affecting market share growth across all distribution channels. 

Both Vanguard and Charles Schwab have two-thirds of their assets in passive products, with the remaining third comprising actively managed mutual funds — the exact opposite for the overall market.

Broadridge noted that Vanguard continues to increase market share across all distribution channels and Schwab has reported that a third of its $62 billion ETF assets comes from channels outside of the Schwab platform.   

In the first quarter, overall net new assets for ETFs grew by 4.3% to $2.9 trillion. The biggest increase occurred in the RIA channel, with net new assets of $38 billion, up 5.4%. 

The RIA channel is the largest retail channel for ETFs by far, with $768 billion.  

First-quarter net new assets for mutual funds in the RIA market amounted to $15 billion, up 1%, for total fund assets of $1.8 trillion. 

The combined growth of funds and ETFs makes the RIA channel the largest retail channel with combined fund and ETF assets of $2.5 trillion.

Other Findings

Broadridge’s data showed that 53% of RIA channel equity fund assets are passively managed at present. During the past year, RIAs have seen nearly $37 billion in estimated net sales go into passive equity products, ahead of all other channels.

Investors in the online channel are the most enthusiastic consumers of passive products, according to the data. Over the past 12 months, investors have put 92% of their net sales into passive products across all asset classes.

At present, 56% of online channel assets are in passive products — the first channel to cross that threshold, according to Broadridge.

“Although it may be tempting to sound the death knell for active products, savvy portfolio managers have been able to keep investors by doing things that many passive products can’t, such as holding low-liquidity and over-the-counter assets,” Broadridge’s director of fiduciary and compliance research Jeff Tjornehoj said in the statement.

Tom Rampulla, managing director of Vanguard’s financial advisor services division, agrees, saying the industry is not dead, just evolving.

“Perhaps the best way to compete with passive is to not compete head-on,” Tjornehoj said. “Managers in the alternatives space use futures contracts and derivatives, for example, to build their portfolios. Advisors in the RIA channel rely heavily on active managers for their ‘alt’ allocations, using them for 79% of their alternative assets.”

— Check out John Bogle Gives Insights on 4 Industry Trends on ThinkAdvisor.