Mutual funds, once the mainstay of any investment portfolio, have fallen from favor across every generation and wealth segment over the last four years, according to a Broadridge Financial Solutions report.
The report looks at three major trends shaping the wealth and asset management industry. These include a large decrease in assets allocated to mutual funds, an increase of new and diverse investors entering the market, and a major shift toward investing in online self-service channels.
The three trends are inherently tied together. The rise in online trading apps with near-zero interest rates and zero trading costs made investing more accessible to investors in every generation. This in turn has led to more investors using online apps and discount brokerages, which led to a decrease in mutual fund investments. Advisors and asset managers should pay attention to these trends to better understand and serve their end clients, said Andrew Guillette, vice president of global insights at Broadridge.
Broadridge, a financial technology company that processes $9 trillion in U.S. securities trades daily, produced the report by analyzing tens of millions of retail investor households and billions of data points spanning from 2018 to 2022.
“This is a massive dataset of individual investment holdings that is analyzed for the report,” Guillette said. “There aren’t any evidence-based studies out there of this scale, and with the industry push towards personalization, firms need to learn more about the underlying end investor.”
According to Broadridge, the data shows an increase in investors with less than $100,000, termed mass market investors by Broadridge, over the last four years.
Mass market millennial investors increased the most, from 35 percent to 44 percent, but the group is not limited to millennials. Gen X mass market investors increased from 26 percent to 31 percent, while Boomer investors increased from 22 percent to 23 percent.
Taken as a percentage of AUM, this influx of investors still represents only a small piece of the pie — but one that will only get bigger with time.
Millennial AUM as a total percentage of market assets grew from 3 percent in 2018 to 5 percent in 2022 — still a relatively small percentage. Investors over the age of 58 currently control 72 percent of all AUM; however, this wealth will eventually be passed down to the younger generation.
“Millennials account for just 5 percent of assets and the mass market holds just 7 percent of assets, but somewhere in there are the wealthy investors of tomorrow, and the challenge is to identify them,” Guillette said.
According to him, advisors need to balance meeting the needs of clients with greater assets while not forgetting the younger investors.
Many of these new investors came through online apps, which grew in popularity during the pandemic, said Guillette. According to Broadridge, online channel usage across every age group grew between 2018 and 2022, while other channel usage remained roughly the same.
However, according to Guillette, the rise in online and discount trading platforms, many of which don’t offer mutual funds, contributed to the decline of those products, which were already struggling against the low-cost and tax-efficient nature of ETFs.
“You have this new wave of tech-enabled investors coming into the marketplace. They’re buying ETFs and individual securities online,” Guillette said.
Mutual funds commanded a smaller percentage of assets in 2022 compared to 2018, with assets invested in mutual funds across all wealth segments falling by at least 10 percentage points. Mutual fund investments by mass market investors fell 14 percentage points to 52 percent. For the mass affluent — investors with investable assets between $100,000 and $1 million — that figure fell 13 percentage points. For high-net-worth individuals with at least $1 million in assets, mutual fund investments fell 11 to 12 percentage points.
Mutual fund assets also declined across every generation. Mutual funds represent only about 26 percent of the AUM of the wealthiest investor, according to Broadridge.
These trends aren’t necessarily bad for advisors. Despite nearly half of millennials seeking investment insight from apps, 60 percent of millennials said they were very likely or somewhat likely to seek investment advice from a financial advisor in the next two years. And while online usage increased across all generations, RIA usage among 45-year-olds and 60-year-olds also increased.