Advisors to Asset Managers: Give Us What We Want, Not What You Want

To achieve scale, some asset managers are realizing they need to sell more of what financial advisors want to buy, according to a report.

Illustration by RIA Intel (Michael Nagle/Bloomberg)

Illustration by RIA Intel

(Michael Nagle/Bloomberg)

Billions of dollars are flowing into mutual funds and ETFs this year as investors seek to capitalize on equities reaching record highs or diversify their portfolios with bonds. Despite this trend, asset managers are not jumping for joy. Industry headwinds are forcing them to change their business priorities and financial advisors are partly to blame.

Fee compression remains a challenge for asset management businesses, but they face others, too. For example, wealth managers are increasingly favoring ETFs as a wrapper and using model portfolios.

Put another way: Asset managers aren’t selling what advisors want – and they aren’t getting the packaging right, either.

“Over the last decade, financial advisors have become far more confident in implementing ETFs in client portfolios. This greater comfort, along with greater model use and fee compression, has spurred many large asset managers – including former mutual-fund-only stalwarts – to expand their product offerings to include ETFs,” according to a report by Cerulli Associates, a Boston-based research and consulting firm.

“In coming years, for an asset manager to gain scale, it will be crucial to offer their investment capital in a variety of wrappers, giving investors and advisors the ability to choose the one that best suits their need,” the report continues.

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At the request of investors and allocators, and after more than a year of serious contemplation, the $529 billion asset manager Dimensional Fund Advisors (DFA) began launching ETFs last year. “By shifting into the ETF space, where products can be bought and sold by any party, with or without an intermediary, DFA is moving away from how it has done business since its founding in 1981,” says the report.Other holdouts are expanding their product lines. American Funds plans to launch ETFs in early 2022, according to Cerulli.

Product diversification such as that described is expected to continue in coming years, especially at asset managers trying to grow to a certain size and scope. Those companies will need to offer whatever best suits the needs of their investors, be it mutual funds, ETFs, or separately managed accounts. Unsurprisingly, the asset managers already doing this are some of the biggest and getting bigger.

More asset managers are prioritizing the creation of new investment vehicles, as well as broadening product distribution to new segments and channels.

“Model marketplaces and strategic partnerships have made it so that independent registered investment advisor (RIA) firms have more access to outsourcing options than ever. However, despite this broadening of access, independent RIA advisors are still the least likely to fully outsource investment decision making,” according to Cerulli.

The vast majority of advisory practices are ill-equipped to build portfolios on their own. When the time comes that they are, many asset managers will be ready.

Michael Thrasher (@Michael_Thrasher) is a reporter at RIA Intel based in New York City.

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