Fee-Based Advisors Largest Holders Of ETFs

The rapidly growing fee-based registered investment advisor (RIA) channel is also the largest holder of passively managed exchange-traded funds (ETFs), according to data released by an industry consultant.

But the industry “ain’t seen nothing yet,” as millennials and RIAs push ETF demand even higher in the future.

Millennials allocate about 36 percent of their portfolios to ETFs compared with 23 percent of portfolios to ETFs for all investors, said Chip Roame, managing partner with Tiburon Strategic Advisors.

“RIAs are the fastest growing channel in financial advice and they are the biggest users of ETFs,” Roame told clients in a presentation.

By the end of last year, RIAs had amassed $475 billion worth of ETFs under management, Roame added.

Advisors with independent broker/dealers hold about $385 billion, followed by wirehouse advisors with $360 billion, private banks with $280 billion, retail banks with $250 billion and discount brokerage firms with $110 billion, he said.

The trend line is important as it signals that ETFs, along with their passively managed index equity mutual fund cousins, will keep growing for the foreseeable future, and will do so at the expense of actively managed funds.

For people who believe that the RIA channel will continue to amass assets, as the channel has for many years, then it follows that demand for ETFs will also grow, Roame said.

More Choices, Robust Flows

Last year, advisors had as many as 1,700 ETF funds to choose from, an increase of about 100 ETF funds from 2015, Roame said.

Money continues to flow into indexing. The cost of indexing is getting even cheaper with companies like Charles Schwab charging 0.05 percent for its Schwab 1000 Index ETF, which starting trading earlier this month.

Schwab 1000 investors pay even less than Standard & Poor's 500 stock index funds because they don’t pay the licensing fees to Standard & Poor's for use of the S&P 500 brand, said Roame, a former senior manager with Schwab.

In 2016, one-quarter of all U.S. equity open-end mutual fund and ETF assets under management were invested in passive funds, an increase of three percentage points from 2015, according to Tiburon’s research.

In the first several months of this year, $54 billion flowed into ETFs and another $65 billion flowed into stock index mutual funds, while $82.4 billion has flowed out of actively managed stock mutual funds, Roame said.

Last year, $236 billion flowed into passive equity mutual funds and ETFs and $265 billion flowed out of actively managed funds as advisors moved assets into cheaper products.

For passively managed funds, asset-weighted average advisory and administrative fees have dropped from 20 basis points in 2010 to 16 basis points in 2015, Roame said.

But for actively managed mutual funds, asset-weighted average advisory and administrative fees have dipped from 56 basis points in 2010 to 54 basis points in 2015.

The industry is reverting ever closer to the 80-20 rule as more than three-quarters of mutual fund assets under management gathered in the 25 percent of mutual funds with the lowest expense ratios, Roame said.

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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