Passive strategies gain favour as clients grow more conscious of fees' return impact
New data on fund flows from the U.S. highlights the urgency among asset managers to provide solutions that more closely match the demands of advisors for flexibility and cost-effectiveness.
According to Matt Belnap, associate director at the researcher, Cerulli Associates, advisors across all channels have become increasingly conscious of the price they pay for access to investment strategies as their clients become even more aware of fees.
To avoid revenue-sharing fees, more advisors are choosing passive methods, the survey claims.
Large-cap shares are among the passive products that are best positioned to amass assets, according to Belnap. Yet, opportunities for active managers still exist, particularly in fixed income and for small- or mid-cap products with capacity issues.
As financial advisors switch their allocations away from mutual funds and toward the more affordable alternatives, demand for ETFs and individually managed accounts will increase.
Although mutual funds are still the most popular product vehicle utilized by advisors, the study implies that long-term flows will be declining.
According to Morningstar Direct, investors contributed US$528.7 billion to ETFs during the year that ended in February while withdrawing US$920,2 billion from mutual funds. The most heavily impacted were actively managed strategies. Within a year, active mutual funds had net withdrawals of $979.3 billion, while index mutual funds saw net inflows of $59.1 billion.
Mutual funds are predicted to decline 13% by 2024, according to Cerulli's poll of advisors, and variable annuities will be used less frequently. SMA and ETF growth is anticipated to be 20% and 16%, respectively. Going to index products and ETFs has helped advisors do a decent job of safeguarding their margins.
Speaking to the Financial Times, Belnap said it’s not yet clear what will happen next. “Will this pressure continue now that there is not a lot of slack to squeeze out of the products anymore?” he asked. It could also mean that advisory fees will fall even more.
In response to the increasing demand for ETFs from advisor customers and the desire for additional flexibility, some companies are providing advisors with new features.
The days of some shops only offering mutual funds are going away, Belnap said.
“You are going to have to be able to offer your capital in a variety of different vehicles if you want to survive,” he said.
