While ETFs have slowly been gaining market share within National Broker Dealer wrap programs, their growth has more or less matched the organic growth rate of mutual funds in wraps since mid-2009. That’s due, in part, to some of the heaviest ETF users in these wrap programs gravitating back to mutual funds as the stock market rose.
These findings come from Strategic Insight’s new report, "How Financial Advisors Use ETFs," a 36-page report that just went on sale. Strategic Insight’s ETF data and in-depth analysis, and national broker-dealer assets, sales and flow data from Coates Analytics combine to provide an unprecedented view of how NBD financial advisors are using ETFs. The report looks at ETFs in NBD wraps, in Rep-as-PM programs within wraps, and at a subject group of financial advisors using ETFs in Rep-as-PM programs based on their actual assets and flows – unavailable anywhere else.
“This study provides a window into how advisors are using ETFs in NBDs – thus, by implication, providing a sense of how they’re being used by advisors in other broker-dealers, as well as among RIAs,” said Loren Fox, senior research analyst at Strategic Insight and the report’s author.
“ETFs continue to gain ground in National Broker Dealer wrap programs, but most of their growth is in newly invested assets – not through advisors who are selling out of active mutual funds in order to switch such assets into ETFs,” said Fox. “ETF firms have great opportunity in capturing incremental growth, while mutual fund firms have an opportunity in winning back advisor interest via innovative funds.”
Within NBD wraps, the most popular types of ETFs in 2010 largely mirrored the mutual fund universe: the top three ETF styles in net inflows were Emerging markets equity, “Specialty”
"How Financial Advisors Use ETFs" found that ETF use is particularly heavy within Discretionary Rep-as-PM (Portfolio Manager) wrap platforms, programs in which the financial advisor maintains discretion to make account transactions on behalf of their clients, without prior client approval. At the end of 2010, within the two large NBDs that Strategic Insight studied, ETFs accounted for 54% of retail fund assets in Rep-as-PM programs tracked by Coates Analytics. Financial advisors working in Rep-as-PM programs have a greater inclination toward early adoption of ETF use. “Because advisors working in Rep-as-PM programs don’t need to persuade clients to use ETFs, and because these programs tend to attract a select group of financial advisors, Rep-as-PM is leading type of wrap program for ETF use,” said Fox.
However, as the recovery of the stock market progressed in recent quarters, mutual funds regained some market share within Rep-as-PM programs; the evidence suggests that the beneficiaries have been nontraditional and flexibly mandated mutual funds – implying that unique active mutual funds have the potential to attract even the financial advisors most heavily invested in ETFs.
"How Financial Advisors Use ETFs" also looked at portfolio construction using ETFs, and found that ETF use within Rep-as-PM programs we studied was growing faster in “satellite”
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Strategic Insight, an Asset International company, is a leading research firm for the mutual fund and wealth management industry, providing clients with in-depth studies, consultation, and electronic decision support systems.