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Surveys, Target Dates, and More

A roundup of investment news.

Morningstar Analysts, 10/06/2009

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. (View the related graphic here.)

This report was prepared by Bing Waldert, a director with Cerulli Associates, and Scott Smith, a senior analyst with Cerulli Associates. 

Costs of Target-Date Funds Vary Widely
An analysis of target-date fund expenses reveals a dramatic range of fees among the 34 series that were studied (at least an 18-month history was required), says Josh Charlson, a Morningstar analyst who performed the study.

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