Morningstar Advisor - October/November 2009 - 19

Investment Briefs RIAs Prefer ETFs, Mutual Funds, Survey Says As broker/dealers move to increase fee-based advice relationships, the business models of B/D-affiliated advisors might seem to be converging with those of independent registered investment advisors. But as a recent Morningstar Advisor/Cerulli Associates survey of advisors shows, significant differences in the channels remain, most notably in product allocation and client net worth. The survey reveals that RIAs have a higher percentage of their assets under management (56%) invested in traditional 1940 Act mutual funds than those advisors affiliated with a broker/dealer (49%). The difference is attributable to RIAs’ higher allocation to equity mutual funds, which account for 38% of RIA assets compared with 30% of a typical B/D respondent’s assets. To complement their fund usage, RIAs have also adopted ETFs, which account for 9% of RIA assets but only 2% of B/D advisor assets. The survey also found that B/D advisors are more likely to allocate assets to insured products: 19% of B/D advisors’ AUM are attributed to annuities and life insurance products versus only 4% among RIAs. The survey also shows that RIAs have been able to target and acquire clients in higher net-worth tiers more successfully than their B/D counterparts. Only 49% of RIAs focus their practices on clients with less than $1 million in net worth, but these core markets account for 71% of B/D advisors. Although this finding would seem to indicate that advisors wanting high-net-worth clients should go the independent route, it is more about correlation than causation. Those advisors who have transitioned to the RIA channel have been more likely to be working with high-net-worth clients before their move than the average advisor. In these cases, advisors’ migration to the RIA channel was more a validation of their success than a catalyst for it. The size of populations also come into play: There are about nine times as many B/D advisors (276,000) as RIAs (33,000), so the population of high-net-worth investors being served through traditional B/D channels outnumbers those served by RIAs. In the same survey, we wanted to find out what is attracting advisors to ETFs, and we weren’t surprised that it’s cheap expenses. Just more than half of survey respondents cited low fees as an important factor in influencing ETF usage. Cerulli has generally seen greater adoption of passive products and greater cost sensitivity among independent RIAs than in traditional B/D channels, and this was evident in the survey: 63% of RIAs named low fees as a major factor in their adoption of ETFs compared with 44% of B/D advisors. Advisors also see ETFs as an efficient way to gain exposure to specific investment themes. Nearly two thirds of survey respondents use ETFs to gain equity exposure, and nearly half of survey respondents reported that they largely use ETFs tactically and actively trade them. ETF usage was fairly widespread among respondents, but penetration is not as deep across the broader advisor universe, with only about half of all advisors having used ETFs. Half of all survey respondents plan to increase ETF usage in the coming years—with almost no advisors planning to decrease their usage. This report was prepared by Bing Waldert, a director with Cerulli Associates, and Scott Smith, a senior analyst with Cerulli Associates. How ETFs Are Employed in Client Portfolios 60% 50 40 30 20 10 Actively trade/tactical Blended approach/ strategic and tactical 52 43.6 49 27 50.9 35.5 20 5.5 Buy and hold/strategic 14.8 1 Other 0 .6 B/D Advisors RIA All Advisors Product Allocation: Percentage of AUM Product 60% 43.6 50 Mutual funds 40 Equity mutual funds 30 Fixed-income mutual funds 20 Other mutual funds 10 Individual securities Actively Trade/tactical Individual equities B/D 50.9 Advisors RIA Product B/D Advisors RIA B/D Advisors All Advisors RIA 49% 27 30% 14% 5% 56% 35.5 38% 17% 1% Variable annuities Money markets, cash, etc. 20 Exchange-traded funds 14.8 Separate accounts 5.5 12% 5% 2% 5% .6 4% 3% 2% 2% 2% 8% 9% 3% 1% 1% 2% 3% 16% 15% Blended approach/ 9% 6% strategic and tactical 7% 9% 1 0 Fixed annuities Buy and hold/strategic Other Variable life/VUL/Whole life/Term/LTC REITs Other Individual fixed-income securities Costs of Target-Date Funds Vary Widely An analysis of target-date fund expenses reveals a dramatic range of fees among the 34 Source: Cerulli Associates, Morningstar. MorningstarAdvisor.com 19
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Morningstar Advisor - October/November 2009

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