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How Independent Advisors Invest Client Assets: Schwab Study

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Independent financial advisors believe that the biggest block of clients’ portfolios should be held in low-cost core investments, according to a new study from Schwab released at its Impact 2018 conference in Washington.

The study of 381 independent advisors found that on average advisors believe core holdings should account for 62% of clients’ portfolios, but more than one-third of those surveyed say the allocation should be 70% or higher.

Schwab defines core holdings as broad large-, mid- and small-cap equities, broad international equities and corporate and Treasury bonds.

“Our industry has a reputation for selling products that can be too expensive and complex, but advisors are continuing to advocate for simplicity, transparency and choice in client portfolios,” said Marie Chandoha, chief executive of Charles Schwab Investment Management (CSIM) , in a statement.

ETFs are the most popular core holding among the advisors surveyed, accounting for 29% of allocations. Moreover, 69% of advisors surveyed expect to increase that allocation in the next five years. In contrast, just 53% expect to add mutual funds to their clients’ core holdings in the next five years, almost as much as the percentage who expect to add individual stocks (52%).

Individual stocks and mutual funds are the next popular core holding after ETFs, accounting for 24% and 25% of allocations, followed by individual bonds, at 18%, and other holdings, at 4%.

“ETFs continue to be significant” among core holdings of advisors’ client portfolios, said Tony Davidow, alternative beta and asset allocation strategist for the Schwab Center for Financial Research. “These building blocks are here to stay.”  

The study did not disclose what portion of ETF or mutual fund holdings are in stock or bond funds or in other assets, but it’s likely that the majority of ETFs are equity ETFs since they dominate that market. Current core holdings of advisors’ clients are split almost equally between passive (49%) and active strategies (51%).

Total cost is the number one consideration advisors cited when deciding on which mutual fund or ETF to choose, noted by 66% of advisors surveyed.

“Advisors told us price matters more than anything else,” said Jonathan de St. Paer, president and head of strategy and product for CSIM, at a session with reporters.

How well a fund tracks its index and the reputation of the fund provider are the next key considerations when choosing funds, noted by more than 60% of advisors surveyed.

When the price and investment objective is the same, performance history is the number one consideration, cited by 58% advisors, followed by track record (49%). Less than 20% of advisors mentioned brand name or tracking error.

Low or no minimums were cited by 58% of advisors as a very important consideration when buying a mutual fund for clients while commission-free was key for choosing ETFs, cited by 70% of advisors.

The study also found that 60% of advisors surveyed invest in smart beta strategies and growth, quality and value strategies dominate, in that order.

When asked about the common behavioral missteps their clients make, roughly three-quarters of advisors cited these three common missteps:

  • Availability: using the most available information without doing analysis
  • Confirmation Bias: seeking information that confirmed their decision while ignoring negative information
  • Loss Aversion: the fear of losses, which prevents clients from seeing other opportunities.

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