Fee-Based Advisors Largest Holder of ETFs

Fee-based financial advisors held more exchange-traded funds than any other distribution channel last year, data show.

ETFs, built like conventional mutual funds but traded like individual stocks, appeal so much to registered investment advisors that RIAs held $475 billion worth at the end of 2017, according to Tiburon Strategic Advisors.

Advisors love ETFS because they are liquid, low-cost and even come with advantageous short-sell rules, said Chip Roame, managing director of Tiburon.

Some industry critics warn that there are too many ETFs, that they encourage short-term trading when advisors should be more concerned with long-term planning, and that too many ETFs are too narrowly focused.

There are about 1,800 ETFs to choose from and millennials are among the biggest users of ETFs, Roame said.

Online advice firms regularly use ETFs as well, Roame said.

ETFs trade directly among investors, not among the fund sponsors, which makes ETFs very tax efficient, advisors say.

An advisor can buy an ETF at 10 a.m. and sell it at 2 p.m. without having to wait until the end of the day when prices are likely to have moved up or down.

ETFs to Reach $6T by 2021

Future trends hold even more promise for the growth of ETFs.

Many industry executives believe ETFs will have the highest investment product usage over the next five years as the popularity of cost-conscious investing spreads, Roame said.

By 2021, ETFs will have gathered an estimated $6 trillion in assets under management, nearly three times the $2.1 trillion in 2015, he said.

ETFs were introduced into the market in the early 1990s.

At that time, they tracked the performance of a broad-based benchmark like the Standard & Poor's 500 index, all U.S. stocks or international stock markets.

Other ETFs simply followed an unmanaged group of securities like dividend-paying stocks.

Since then the industry has grown with ETFs following narrower benchmarks like stocks of natural gas, restaurant or aerospace companies.

About 12 percent of RIA client portfolios are allocated to ETFs compared to 6.5 percent of portfolios for advisors at wirehouses and independent broker-dealers, Roame said.

Last year independent broker dealers held $385 billion in ETF assets, wirehouses $360 billion, private banks $280 billion, retail banks $250 billion and discount brokerage firms $110 billion, Tiburon research found.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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