ETFs will be the primary investment in the future say advisors

Financial advisors are expecting a larger share of clients’ funds to be allocated to ETFs in the next five years according to a new survey.

And with most saying that ETFs already make up the largest portion of their clients’ core investments, two thirds of advisors believe that ETFs will have primacy in client portfolios in the future.

A survey of 381 independent financial advisors across the US by Charles Schwab Investment Management (CSIM) shows that most FAs believe the majority of client portfolios should be allocated to core investments, defined as broad large-, mid-, and small- cap equities, broad international equities and corporate and Treasury bonds, regardless of investment vehicle.

“An investor’s core holdings are the foundation of their investment portfolio, and independent advisors are focused on finding low-cost, straightforward products for their clients to serve as those crucial building blocks,” said Marie Chandoha, chief executive officer of CSIM. “Our industry has a reputation for selling products that can be too expensive and complex, but advisors are continuing to advocate for simplicity, transparency and choice in client portfolios.”

Core investments now and in the future

Wealth matters in decision process
Deciding on allocations to core investments is based on economic and market but 86% of FAs said that a client’s wealth is a deciding factor.

Not that respondents agreed on where the threshold should be with 46% saying “mass affluent” clients (with U$100,000-$249,999 in investable assets) should allocate more of their portfolio to core holdings than “high net worth” clients (with $1 million+ in investable assets) - and 40% saying the opposite.

Total cost is the largest factor when choosing an index fund, whether mutual fund or ETF, but beyond that the advisors consider performance history, track record, and an asset manager that provides great portfolio construction education and guidance. Just 16% ranked a fund’s brand name as an important factor in decisions.

For mutual funds, low or no minimum was also very important for 58% of FAs.

“Independent advisors are focused on choosing the best products to achieve their clients’ goals without unnecessary costs or onerous minimum investment requirements. Advisors are a bellwether for the investing industry at large, which is heading toward greater access and affordability,” said Jonathan de St. Paer, president and head of strategy and product for CSIM.

ETFs rise but mutual funds still important
Although more than half of respondents said that ETFs are already their clients’ primary investment vehicle and 64% expect that to be the case in the future, 41% said mutual funds are the primary investment vehicle they use today.

Millennial advisors are more likely to expect a greater share of ETFs (60%) along with female advisors (57%).