ETFs just surpassed mutual funds in popularity with advisors, according to the FPA's annual investing survey.

In all, 81% of advisors surveyed said they used or recommended ETFs versus 78% who said they used or recommended mutual funds, the FPA says.

The flip in popularity -- this is the first year in the 10-year-old survey's history that ETFs topped the results -- is "not a surprise given where we are at in this market cycle, with the likelihood of low returns going forward and the need to cut expenses," says United Capital advisor Mike Surenkamp of Indianapolis.

Surenkamp currently has about 10% of his clients' assets in ETFs, but anticipates that number will grow to 30% by this time next year. That's largely due to the fact that Surenkamp recently sold the firm he founded -- CS Capital Management -- to rollup firm United Capital, which emphasizes cheaper investments for clients.

"It's a big jump," he says.


The industrywide shift toward ETFs -- most of which are lower-priced, index-based investments -- reflects the steady move of the financial advisory service towards a fiduciary standard of care for clients, says Cameron Thornton, a planner in Burbank, Calif.

"If, in fact this push toward fiduciary is going to become a reality," Thornton says, "I think an investment advisor needs to look at the lowest-cost investment vehicles for their clients."

Thornton has gone through his own evolution toward lower-cost investments in the 33 years since he started his firm, he says.

"When I started in the business in 1982 I did use load mutual funds. It's a reality," he says.

Then he moved into no-load mutual funds and then institutional mutual funds before switching to low-cost funds from Dimensional Fund Advisors, with fees ranging from 5 to 25 basis points, he says.

Thornton says he uses ETFs mainly to give his clients exposure to real estate investments at a low cost while maintaining liquidity.


Back in 2006, when the FPA first conducted the survey, it found that just 40% of advisors used or recommended ETFs. That number jumped to 44% in 2008.

Like Surenkamp, 51% of surveyed advisors said they plan to increase their use or recommendation of ETFs in the next year.  "No other investment vehicle showed this level of anticipated increased usage," an FPA release says of the findings. "For example, 23% of respondents plan to increase their use of mutual fund wrap programs, and 22% plan to increase their use of individual stocks."

Despite media hype around "smart beta" ETFs -- funds designed to outperform around one factor or another, such as cash flow or companies that pay dividends -- only 22% of respondents said they had used them in the past 12 months.

Other survey findings include:

  • Advisors continue to move away from annuities. Just 38% of respondents say they are using or recommending variable annuities, compared with 41% last year. Back in 2006-2008, the FPA says, a majority of advisors said they were using them.
  • Over the past three months, 28% of advisors said they have been reevaluating asset allocations due to tax rules.
  • A majority (61%) of advisors said they believe a blend of active and passive management provides the best overall investment performance. More advisors (24%) said they had increased their use of passive funds over the last year than those who had increased use of actively managed funds (15%).
  • The survey also showed that a slight majority of advisors are maintaining a positive long-term economic outlook: 51% said they feel "bullish" about the coming five years, while just 41% said they feel "bullish" about the next six months.

The survey was conducted in March and includes responses from more than 300 financial advisors of various backgrounds, the FPA says.
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