RIAs Pursue ETFs with Vigor

An analysis from financial analytics firm Cerulli Associates finds exchange-traded fund (ETF) use among registered investment advisers (RIAs) has grown nearly 27% annually over the past five years.

Cerulli anticipates the growth to continue at a strong pace, meaning the RIA channel remains an attractive opportunity for asset managers looking to capture flows from the defined contribution (DC) retirement planning space. In “RIA Marketplace 2013: The Changing Landscape of a Maturing Industry,” Cerulli finds the year-over-year growth rate of assets directed to ETFs among RIAs reached 48% in 2012.

Kenton Shirk, an associate director at Cerulli, explains much of the growth comes from RIAs seeking a cost-effective method for achieving diversification in client portfolios. And as adoption increases, so does the variety of investment strategies in which advisers put ETFs to work, the firm says.

Over the course of 2012, the dually registered segment of the RIA market experienced nearly double the ETF asset growth rate (21.5%) of independent RIAs (11.5%), Cerulli finds. Those rates are likely to accelerate, as 49% of RIAs contacted for a survey underlying the report say they plan to add more ETFs to their clients’ portfolios. Just one in 100 advisers say they plan to reduce allocations to ETFs next year.

Although no other product category received such widespread support, about 30% of advisers also expect to add new equity funds or alternative/commodity funds next year. Real Estate Investment Trusts (REITs), at 21%, also sparked substantial interest among advisers.

Cerulli finds ETF interest is most often tied to diversification and alpha exploration opportunities. In these cases, advisory practices have typically settled on their core portfolio construction staples or manager selection beliefs, but are looking to develop additional relationships outside the expertise of their current providers in order to improve the potential portfolio outcome of their investors.

The key for ETF providers looking to gain scale in RIA portfolios, Cerulli says, is to help advisers understand how the provider’s strategy addresses the particular needs and objectives of an RIA’s clients. Equally important is for a provider to prove they are truly the best equipped to supply the specific expertise the RIA wants.

Cerulli warns that, even among experienced financial advisers, education on ETFs can be an uphill battle for product providers. The RIA community generally exhibits an intellectual curiosity about potential additions to their product portfolios, but can remain unconvinced of the necessity for change due to the complex nature of some ETF investments, Cerulli says.

Information on how to obtain Cerulli’s latest report, including a short sample and the table of contents, is available here.