Why aren’t CITs more popular? It’s a question confounding industry watchers, as many of the same benefits can be had for cheaper than their ’40 Act counterparts.
According to survey data from Coalition of Collective Investment Trusts (CCIT) and Cerulli Associates, CIT assets stood at $3 trillion as of year-end 2018.
The investment vehicle exhibited a compound annual growth rate (CAGR) of 7.25% over the five-year period ended 2018.
Notably, a temporary dip in market performance at the end of the period (4Q 2018) hindered what would have otherwise been a higher growth rate.
Generally priced lower than other retirement plan vehicles, such as mutual funds, costs continue to be the primary growth driver of CITs. However, broader penetration will depend upon CIT providers’ ability to address potential headwinds to growth and secure opportunities to improve advisor education.
Funds and flows
In recent years, defined contribution (DC) plans have accounted for the majority of flows to CIT products, forcing providers to increasingly question strategies for tapping the channel.
“More than 40% of CIT providers identify financial advisors’ lack of CIT knowledge as a top challenge to adoption in DC plans,” James Tamposi, senior analyst at Cerulli, said in a statement. “This highlights that one of the biggest initiatives has been to increase education and awareness of the vehicle among plan sponsors, financial advisors, and other industry participants.”
Another challenge that CIT providers face is addressing investors’ expectations for transparency.
“The lack of consistent, public reporting factors into DC plan sponsors’ reluctance to adopt the vehicle,” says Anna Fang, research analyst at Cerulli. “Almost half of providers surveyed noted that CITs’ lack of transparency relative to mutual funds threatens the vehicle’s adoption.”
Cerulli’s survey findings show that providers should continue to offer advisors as much information and transparency as possible (e.g., reporting, commentary).
The industry will be pressed to educate the advisor world, dispelling any long-standing myths that are preventing otherwise valuable vehicle recommendations.