Advisor Use of ETFs is Growing but Mutual Funds Still Rule

By Hal M. Bundrick

NEW YORK ( MainStreet)--The popularity of exchange-traded funds among retail investors is well-documented as total ETF assets have grown to $1.3 trillion, increasing more than 27% in 2012 alone. Financial advisors have also been climbing onto the ETF bandwagon, but with a bit less enthusiasm.

It seems old habits are hard to break. On average, advisors allocate 37.4% of portfolios to mutual funds, according to research by Cerulli Associates. By contrast, while wirehouse reps are the most likely to use ETFs, they only allocate 6.7% of client portfolios to them. RIAs and dually-registered advisors assign the largest portion of portfolios to ETFs, 13% and 11.5%, respectively.

"Almost two-thirds of wirehouse advisors report using ETFs, the highest percentage out of all the channels," says Alec Papazian, associate director in Cerulli's asset management practice. "More than half of registered investment advisors (RIAs) are using ETFs, and fewer than 50% of advisors in the remaining channels use ETFs."

According to Cerulli's report, Exchange-Traded Fund Markets 2013, many advisors are most comfortable using ETFs as a tactical enhancement to client's portfolios, while continuing to anchor primary investments with mutual funds. ETF strategies deployed in separate accounts or within custom models come in 530 different strategies with $63 billion in assets held in managed portfolios as of 2012, according to Morningstar.

The stumbling block for additional deployment of ETFs in client portfolios comes from advisors preferring active management. It also may be a case of, "If it ain't broke, don't fix it." Advisors are simply comfortable with mutual funds after decades of use. And the fact that many employer-sponsored retirement plans have yet to allow ETF investments is also slowing growth momentum among advisors.

But when it comes to passive investing, ETFs are clearly conquering the market: ETF flows have outpaced index mutual funds every year since 2003.

--Written by Hal M. Bundrick