While more investment advisors are pivoting back toward actively managed funds, it's low-fee funds and ETFs that rule the roost across the fruited plains.
That's the outlook from Broadridge Financial Solutions, Inc., in a new report. In it, firm analysts cast some helpful light on fund flows for the first six months of 2017, including the following "hot takes."
- Net new asset growth increased by $566 billion, or 5.5%.
- Almost 77% of fund and ETF net new assets, $433 billion, went into lower fee passive products.
- Net new assets into actively managed funds from all retail channels - independent broker dealer, wirehouse, RIA and online retail - were up $87 billion versus $48 billion for passively managed funds.
- Overall assets for ETFs increased by 11.6% to $3.1 trillion.
- The fastest growing channel on a percentage basis for the first half of 2017 was the direct online channel, up 20%.
But it was the trend toward low-fee funds and ETFs that commanded the most attention from the Broadridge report. That's the case, even though actively managed funds did gain some traction, with independent broker dealers and wirehouse firms adding net new assets of $150 billion and $40 billion, respectively into institutionally priced actively managed funds.
"Actively managed funds saw positive flows during the first half of 2017, even as advisors continue to invest client assets in passively managed ETFs and index funds at an increased rate," says Frank Polefrone, senior vice president of Broadridge's data and analytics business. "Net new asset flows into institutional shares of actively managed funds in the first half of 2017 is further proof that price and performance are the driving factors in advisor fund selection."
"We expect to see the move to lower fee share classes continue throughout 2017 as the majority of advisors move to a fee-based practice, and the broker dealer home office realigns the mix of share classes offered to meet both client demand and regulatory requirements related to the DOL fiduciary rule," Polefrone adds.
The lower the fee, the higher the chance a fund will land new investors. That, in itself, is no shock. But the rapid pace of low-fee fund inflows may be changing the face of the mutual fund industry.
"Today's advisors march to the drum beat of 'fees, fees, fees,' and fund manufacturers without a low-cost solution are, at best, being ignored and at worst, getting trampled," notes Jeff Tjornehoj, Broadridge's director of fiduciary and compliance research. "While equity mutual funds have outflows of $69 billion collectively, those with an expense ratio of just 20 basis points or less have inflows of $93 billion."
The battle ahead is about how fund sponsors will accept a fraction of what they historically collected, Tjornehoj. "Even channels that traditionally supported premium priced products, such as wirehouses and broker dealers have shifted strategies based on fees," he says.
Financial professionals see the move toward low-fee funds and ETFs as a trend that is here to stay.
"It's clear to me investors are now selecting low-cost funds and ETFs," says Dan Sondhelm, CEO at Sondheim Partners in Alexandria, Va. "In fact, low cost is more of a driver than passive versus active [portfolio models]. If an investor or financial advisor engages in the story of a fund -- citing history, asset class, process -- and he or she likes overall fund performance, and views expenses as reasonable, the product has a higher likelihood to be purchased."
Perhaps the "cost factor" may even become a bigger priority, for clients and advisors.
"I believe we are experiencing a secular shift to lower cost investing," says Nathan Geraci, president of the ETF Store, Inc., in Overland Park, Kan. "While some advisors will always chase performance with actively managed funds, many more advisors have come to the realization, or are being forced to come to the realization through the DOL fiduciary rule, that focusing on fund costs is a more productive way to generate higher returns over the long-term."
At the end of the day, recent fund flows are much more about lower costs than active versus passive management, Geraci says. "I expect fees of actively managed funds to continue to experience downward pressure and through that process, at some point, perhaps the value proposition of these funds will become more compelling," he adds.
Other money managers agree, noting that low-fee funds can also compete with larger, more expensive funds on multiple levels.
"I am almost certain they will stay the course with low-fee funds," says Paul Ruedi, a financial advisor at Ruedi Wealth Management, in Champaign, Ill. "Now that advisors have switched to low-fee funds and have emphasized the impact of fees to their clients, it's extremely hard to justify switching to expensive actively managed funds that do more or less the same thing but charge ten-times the fee."
"Once investors become conscious of fees, there's no turning back," says Ruedi.
That's a statement that could keep traditional mutual fund managers up into the wee hours, wondering where all their assets went.
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