Top Trends in the Adviser-Sold Investment Markets

Strategic Insight research reveals traditional broker/dealers are slowly losing dominance in the adviser-sold investment marketplace.

Retirement specialist advisers will be well aware that share class issues and movement towards flat-fee for advice arrangements are reshaping how fund providers package and sell their retirement plan products—but Strategic Insight (SI) research shows these trends extend widely across adviser-sold channels.

That was the case presented by Dennis Bowden, managing director of U.S. research at SI, during a recent webcast hosted by the firm. The presentation was drawn from Strategic Insight’s latest Fund Sales Survey, covering 42 investment firms controlling $6.4 trillion of long-term fund assets under management as of December 2014—including more than $1.1 trillion of gross sales during 2014.

The data covers investment firms selling products inside and outside the qualified retirement plan space, but one clear trend across the data is the “increasing externalization of investor costs assessed outside of fund expense ratios,” Bowden said. “At a high level, the intermediary marketplace is very mature and well-established, but it’s still slowly evolving,” in part to reflect new thinking about share classes and how people should pay for access to investment products.

Bowden noted the influence of broker/dealers in driving and controlling fund flows is still strong—the SI data shows this channel accounted for about 55% of total adviser-driven sales in 2014. This is down from about 60% in 2007, he observed.

“What’s really interesting is that, while the sales are slowing for traditional broker/dealers, the influence of large broker/dealers over their fund manager distribution partners has in some respects never been greater,” he said. “This is especially the case from the perspective of shelf space, portfolio allocation space, the costs of distribution within the marketplace, and from the revenue sharing and pricing demands that are prevalent in the broker/dealer part of the market.”

Beyond traditional B/Ds, the registered investment adviser (RIA) community accounted for about 13% of sales last year among SI’s survey group of traditionally B/D-focused fund managers, while the defined contribution investment only (DCIO) market accounted for 19% of new business.

“Looking across all these adviser-intermediary channels, growth in the markets continues to be the primary driver of expansion for different fund firms,” Bowden noted. “We’re also seeing a real shakeup and increasing diversity in the cost profiles of accessing different distribution routes.” 

Overall adviser-mediated sales actually showed a negative 3% absolute growth rate in 2014, Bowden said, but it’s important to note that this comes on the heels of a 23% increase in 2013.

“When we look closely, we can see that among the major channels, DCIO services saw the best absolute growth in 2014,” Bowden said. “Considering investment-only DC more broadly, what we’ve seen in the last eight years we’ve been tracking this info—the channel has shown consistently steady but unspectacular growth. In a lot of ways that makes sense, because of the appealing characteristics of the channel.”

Bowden said the DCIO channel has seen positive sales growth every year since 2010—making it the only major adviser-intermediated channel in the survey to show this strength.

“The stability of assets within the DC space is really appealing for fund providers, especially as the general velocity of asset movement has just continued to go up and up in recent years,” Bowden said. 

SI finds the independent regional broker/dealer channel has also been steadily growing and maturing. “The independent B/D space should be succeeding this way—from the perspective that this has been a key channel for active fund demand, especially compared with other parts of the market,” Bowden said. “This channel has really been strong for building active fund demand since the financial crisis.”

At the same time, national broker/dealers are showing “an interesting dynamic,” Bowden said. They are decreasing in terms of proportional sales, but looking at the typical firm from an absolute growth rate perspective, the median statistics are more stable and highlight the channel’s continued strength.

“This really speaks to the fact that, clearly, the national B/Ds remain an important foundation of distribution for a wide range of fund firms,” Bowden said. 

Looking across adviser-driven channels, fee-based advisory programs are becoming an increasingly common thread.

“As a proportion of total sales on a national level, these programs are really picking up,” Bowden said. “In our survey, for two years straight, more than 70% of overall sales within the adviser-driven channels have been done within the context of a fee-for-advice structure. This shift in the adviser business model has been in the works for a number of years … Increasingly important will be the way the fee-based structure has opened up the ability for more advisers to integrate exchange-traded funds (ETFs) or other no-load passive vehicles into their portfolio construction process.”

Interestingly, fee-based advisory sales from an absolute growth perspective actually decrease in 2014—the first time this has happened in all the years SI has run the survey. Bowden said there are “a lot of reasons behind this, but some of it is the evolving integration of active and passive together within the portfolio construction process.”

Bowden said that in some ways, “we’re really seeing the selection process for mutual funds and ETFs converging.” Advisers who have long been wedded to mutual funds are increasingly willing to consider ETFs in the portfolio construction process. In adviser-focused channels there is especially strong interest in access to passive U.S. equity ETFs, according to SI.

“Related to this, there remain strong opportunities for advisers to bring in well-performing active U.S. equity funds—but tolerance for average performance out of active funds is clearly decreasing,” Bowden concluded. “Top-performing active funds are seeing very strong flows, while average and poorly performing funds are losing ground. It makes sense that top funds will be sought after, but we’re clearly seeing a decreasing tolerance for average risk-adjusted performance.”