Exchange-traded funds have been financial advisors’ investment vehicle of choice for clients for three years running, and their popularity continued into 2018, according to a new survey released Tuesday by the Financial Planning Association, the Journal of Financial Planning and the FPA Research and Practice Institute.
Eighty-seven percent of advisors said they currently used or recommended ETFs with clients, up from 72% in 2010 and just 44% in 2008.
Over the past five years, two-thirds of advisors have preferred a blend of active and passive management style, but are now leaning toward a purely passive approach. In the new survey, 22% said a passive approach provided the best overall investment performance considering costs associated with an active, a passive and a blended management style, up from 15% in 2017.
Forty-six percent of advisors in the survey said they planned to increase their use or recommendation of ETFs with clients over the next 12 months, down four percentage points from the 2017 poll.
“With only 200 active ETFs out a universe of nearly 5,000, the continued rise in advisors’ use of this investment vehicle is clearly congruent with the uptick in their adoption of a purely passive approach to investing,” Dave Yeske, managing director of Yeske Buie and practitioner editor of the Journal of Financial Planning, said in a statement.
“And while 65% of advisors continue to favor a blend of active and passive approaches, these results suggest that the ratio may be shifting in favor of passive.”
The survey, which was fielded online in April and May, received 265 responses from financial advisors of various backgrounds and business models.
Crypto Gets a Big ‘No’
The survey found that 53% of advisors were responding to client questions about cryptocurrencies, but only 1% were using or recommending these investments — a result Yeske called “gratifying.” The report said this trend would likely continue as only 2% said they would increase their usage or recommendation of cryptocurrencies over the next 12 months.
Financial advisors are wise to talk to clients about cryptocurrencies, as not doing so could risk losing their business to a competitor.
Asked their opinion of cryptocurrencies as an investment, 24% of survey respondents considered them a “gamble; only worth investing money you can stand to lose”; 29% saw them an “interesting concept to keep an eye on, but not invest in yet”; 18% said they were a “fad that is best avoided”; and 26% said they were “not a viable investment option.”
A mere 2% of advisors said they were a viable investment option that had a place in a portfolio.
Some wealthy investors, who could afford to lose money on cryptocurrencies, will have nothing to do with them — Warren Buffett has called them “probably rat poison squared.”
ESG on the Rise
In contrast, 26% of advisors in the poll said they used or recommended funds focused on environmental, social and governance investing with their clients, and 20% planned to increase ESG usage in the future.
The report said that as more clients ask for socially responsible investment strategies, it was essential that advisors go all out to help them meet their investment goals.
Later this year, the College for Financial Planning will introduce the Chartered SRI Counselor designation for financial professionals, in collaboration with the US SIF: The Forum for Sustainable and Responsible Investment.
Among 19 other investment vehicle options besides ETFs, 83% of advisors said they used or recommended cash and equivalents, 73% non-wrap mutual funds, 56% individual stocks and 46% individual bonds.
The report noted that 2018 marked the eighth consecutive year that cash and equivalents were one of the most preferred investment options by advisors, having shot up more than 30% between 2008 and 2010 and exceeded a 74% usage or recommendation rate since that time.
This trend is unlikely to end soon as 24% of advisors said they planned to increase their use or recommendation of cash and equivalents over the next 12 months.
Fifty-one percent of advisors expressed at least some confidence that a 60/40 portfolio would continue to provide historical returns, while only 5% were very doubtful these portfolios were still viable.
Although 64% of advisors said they continually re-evaluated the asset allocation in client portfolios, 32% said the new tax reform would prompt them to review how their clients were allocated.
As to advisors’ economic outlook, they appeared to be more bullish about the economy in the short term and more skeptical for the long term. Twenty percent purported to be completely bullish for the next six months, and just 7% said they were completely bullish for the next two years.
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