While it has been difficult to track just who has driven the record-breaking trading in ETFs over the past few years, the industry has long known that its investors are a mix of institutional and individual investors. What hasn’t been as well reported, however, is that of those individual investors, nearly two-thirds are purchasing these funds on their own—whether they have an advisor or not.
That’s the most recent news from Cogent Research, for which it interviewed 4,000 investors with $100,000 or more in investable assets last October.
ETFs—known for their low cost, transparency and high liquidity—have been touted as easy-to-use passive investing tools. That may be paying off for fund companies, as the number of investors who said they currently own ETFs is up 2% from a year earlier, a trend many are contributing to actively managed mutual funds’ disappointing performance during the recent downturn.
For advisors, though, ETFs’ simplicity may also be leading investors to think they can leave them out of the equation. In fact, nearly one in four current ETF holders and 26% of those who plan to soon buy ETFs actually have advisors—they’re just not using them.
While the Cogent survey did not delve into the reasons these investors are sidestepping their advisors, some in the industry are blaming advisors who have been slow to adapt to the new shift in focus.
“It’s obvious that ETFs are starting to dig into the mutual fund marketplace and market share. For savvy advisors that are up to speed not only on what’s available in the market but what their clients are looking for, it’s a huge opportunity,” says Tom Lydon, president of Global Trends Investments and ETF Trends and editor and proprietor of ETFTrends.com. “But those that haven’t adapted to utilizing ETFs at all may get left in the dust. Clearly, the message is if you haven’t addressed ETFs with your clients—whether you choose to use them or not—it needs to happen now.”
Of those who do have an advisor, 23% are affiliated with a national wirehouse, 20% with an insurance company, followed by regional firms and banks. The number of self-directed investors that use RIAs, was not measured.
“While some investors haven’t been as excited about their mutual fund holdings, they’re not very excited about their advisors these days either and they’re taking control of their portfolio and making their own decisions,” Lydon says. “And based on the fact that people are voting with their feet, they seem to be very happy with ETFs; you can tell by the asset flow.
Those who are buying ETFs are generally younger and wealthier, with 14% of Gen X invested in them, compared with only 11% of older boomers and 9% of younger boomers. Those who bought ETFs on their own were more aware of the different fund providers and even more likely to increase their usage of the funds than those who go through an advisor.
That’s largely in line with who is doing the research to find out about these products. Nearly 90% of the visitors to Lydon’s ETFTrends.com are self-directed investors, and only 12% are financial advisors, Lydon says. These people are well-educated too: one-third of the sites’ visitors have a graduate degree under their belt.
Does that mean these self-directed investors are knowledgeable enough to make ETF purchases on their own? Absolutely not, says Lou Stanasolovich, CEO and president of Legend Financial Advisors in Pittsburgh. “Investors are desperate for returns and like anything else they’re piling in now after a good year and they think they can do it on their own which is a huge, huge mistake,” he reveals. “Investors think they know better themselves, but they will take too much risk when it isn’t warranted.”
Muddying the waters even further, nearly 15% of the survey’s participants said they were invested in inverse or leveraged ETFs—high-risk products that, in the wrong hands, could put investors in hot water. Another 54% plan to buy inverse or leveraged ETFs this year.
Unfortunately, though, 52% of current inverse and leveraged ETF owners in the study said they believed an appropriate holding period for these products is a month or more. Eighteen-percent said they don’t know what an appropriate holding time is. This, unfortunately, illustrates these investors’ minimal understanding of the funds, as regulators and providers alike have spent much of the last year and a half claiming that these funds are to be held for no longer than a day or two at a time.
For advisors, this is an opportunity to prove their value proposition, by explaining to clients the dangers and risks involved with trading ETFs on their own, Stanasolovich says. But first, advisors need to get educated.
“Most advisors don’t understand the nuances of trading,” Stanasolovich claims. “Advisors need to become sophisticated in trading these funds. Ask about things like liquidity, about how to make big block trades through their custodians. They’ll be in for an education.”
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