US financial advisers drive ETF growth

Financial advisers in the US are helping to drive growth for the exchange traded funds industry, according to Cerulli Associates, a fund consultancy, with ETFs becoming more intensively used in clients’ portfolios.

“Adviser adoption of ETFs continues to be the foundation of growth for the industry,” said Alec Papazian, associate director within Cerulli’s asset management practice.

ETF adoption among US financial advisers varies considerably. Almost two-thirds of those that work for large financial companies (known as wirehouse advisers) have adopted ETFs while 55 per cent of registered independent advisers (known as RIAs) also use ETFs.

But ETFs are used by less than half of the advisers across all other sales channels, such as those linked to banks and insurance companies.

Mr Papazian said wirehouse advisers and RIAs generally operated fee-based models that were more suited to ETFs while advisers in other sales channels were more likely to generate some of their earnings from commissions paid by mutual funds. ETFs do not pay commission to financial advisers.

ETF managers, said Mr Papazian, had also tended to concentrate their marketing efforts on wirehouse advisers, the largest group by assets, and RIAs, the fastest growing group by assets.

But ETF usage among US financial advisers remains relatively light. On average, just 7.1 per cent of financial advisers’ portfolios are allocated to ETFs compared with mutual funds, which make up 37.4 per cent.

Even among RIAs, the most enthusiastic ETF users, ETFs only make up 13 per cent of clients assets.

Mr Papazian said that understanding how the use of ETFs varied among financial advisers could help fund managers in developing their sales strategies.

“When targeting wirehouse advisers, it is likely that resources should be focused on increasing allocations to ETFs rather than looking for new adopters,” he said.

“[But] clearly there is no ‘silver bullet’ for converting an adviser to the use of ETFs, or increasing the use of those who have adopted the vehicles,” said Mr Papazian, who emphasised that ETF managers would require multifaceted plans that included working with fund platforms and initiatives to improve the understanding of how ETFs could best be used in clients’ portfolios.

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