Addressing the RIA Segment

As ETF sponsors develop their marketing plans, the issue of which customer segments to focus on is a critical one.

A recent report from Broadridge Financial Solutions shows that for the first time, RIAs increased ETF and mutual fund assets at a faster pace than all the other retail channels in the U.S. (12% in the first half of this year vs. 9.8% for overall third party channels during the same period). This confirms a long-term trend in the U.S. away from commission based brokerage models toward fee-based independent advice.

In response, ETF sponsors have ramped up their wholesale distribution teams to address the needs of this fast growing segment. Below are some strategies that fund providers can employ when marketing to this segment.

1. Engage With ETF Strategists

The term RIA is a catch-all phrase that can be used to represent a whole swath of independent advisors. As industry executives know, RIAs can range from solo advisors or 2-3 person outfits with assets below $100 million to much larger firms that have assets above $1 billion. The latter tend to behave more like institutional investors, and may not even classify themselves in the same category as smaller independent RIAs. Given the diversity of this segment, painting it with a broad marketing brush would be a mistake. Instead, ETF sponsors need to identify specific marketing approaches that can lead to the highest impact.

One effective approach is for ETF sponsors to engage closely with ETF strategists. Since ETF strategists predominantly use ETFs to execute their investment strategies, typically with a macro view toward asset allocation, they represent a good segment for a targeted marketing effort. Some ETF sponsors have already been explicitly targeting ETF strategists in an effective manner. Firms like Invesco PowerShares, State Street (SPDRs) and Blackrock (iShares) in particular have been at the forefront of engaging ETF strategists through discussion forums and networking events. The implications of this for other sponsors is that they need to have specific sales collateral, events and sales staff to engage this segment.

There are several advantages to this approach. First, it has a multiplier effect. This is because many smaller, independent RIAs outsource their investment management function to ETF strategists. This allows the smaller firms to focus on client development and communication in order to grow their businesses. By focusing on ETF strategists, ETF sponsors can influence the allocation of these assets that have been outsourced to the strategists. Second, engaging with ETF strategists can help in the innovation and product development process. They are typically early adopters of ETFs and have a nuanced understanding of key concepts such as index construction, factor based investing and strategy indices that have driven the growth of the ETF industry. There have been several cases where ETF strategists have approached sponsors and requested specific types of ETFs to be introduced. This two-way discussion allows the sponsor to get customer input when developing new products, and thereby increase the chances of product success.

2. Understand the Philosophy of the Strategists

Though ETF strategists (and the RIA community more broadly) use ETFs extensively, they often have very different investment philosophies. There are some common themes e.g. they tend to have a macro approach to investing rather than a stock picking view. However they tend to vary widely on the 'passive vs. active' spectrum. At one end of the spectrum, some strategists started using ETFs as a substitute for more traditional index mutual funds. They tend to fall in the more traditional index-based investing category. They are typically most concerned with minimizing fees and portfolio turnover. They usually tend to prefer market cap weighted indices. Further down the spectrum, there are strategists who use 'enhanced' indices that may be fundamental, factor or equal weighted. Some of the strategists have come to adopt ETFs after using products from firms like DFA than emphasize multi-factor based indexing. Finally, there are strategists who are at the 'active' end of the spectrum. For e.g. they may move more decisively between equities and cash based on the market environment.

The implication of this is that sponsors need to tailor their marketing and distribution accordingly. The conventional approach to dividing up territory for wholesalers is by geography or target firm size. However another approach would be to segment ETF strategists by their investment philosophy. The type of tools and information required by a more traditional indexer is very different from that required by a more active ETF strategist. Fund providers need to develop customized material that can highlight the aspects of ETFs that are most relevant to each of these segments. For example, the sales material for the more traditional indexers should address their primary concerns around expense ratios and turnover. Similarly, the content for the 'enhanced' indexing audience should focus on the underlying indices, since they tend to be more focused on index construction methodology and factor exposure. As the RIA segment continues to grow in importance, asset managers will need to tailor their marketing accordingly. Specifically reaching out to ETF strategists and tailoring the information and tools to suit their investment philosophies is an effective way to engage with them to drive asset growth.

Aniket Ullal is the founder of First Bridge Data, an institutional ETF data provider.

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