They’re getting all the attention. So-called strategic beta ETFs are increasingly popular, and will comprise 20 percent of client ETF portfolios by 2018, according to Cerulli Associates.
The Boston-based research and consulting firm further says that 58 percent of ETFs used in client portfolios will be pure passive vehicles by the same date, while 21 percent will be active ETFs.
The research also indicates that compliance with the new U.S. Department of Labor (DOL) Conflict of Interest Rule is the No. 1 priority of managed account sponsors.
“The objective of the rule is to enable plan participants and individual retirement account (IRA) owners, who often lack investment expertise, to receive quality advice that is in their best interest,” Onkita Ganguly, associate analyst at Cerulli, said in a statement. “Firms need to educate advisors on what it means to be a fiduciary and everything that can be considered a conflict of interest.”
According to lawmakers, conflicts relating to financial advice cost Americans approximately $17 billion every year. Cerulli data indicate that home-office model portfolios often outperform advisor-driven portfolios, and pose less of a compliance risk.
“Firms are looking to decrease the number of firm relationships and products available because the more product variation, the greater the compliance risk to the firm,” Ganguly explains.
“With the implementation of the new rule, sponsors will embrace a portfolio construction philosophy that seeks to reduce risk, lower fees, and use passive investment vehicles,” states Tom O’Shea, associate director at Cerulli. “We expect asset managers to see a greater demand for passive ETFs in managed accounts, which will result in clients owning very similar, cookie-cutter portfolios. In order to set themselves apart, financial consultants will have to focus on other higher order investment advisory activities, especially goal-based planning.”