Financial advisor use and recommendation of ETFs is continuing to grow, outpacing all other investment vehicles surveyed by the Financial Planning Associations Journal of Financial Planning and the FPA Research and Practice Institute.
A total of 79% of advisors currently use or recommend ETFs with clients, up from just 40% in 2006, the survey shows.
The $1.7 trillion exchange-traded sector still is well behind the $15.2 trillion mutual fund industry, according to Investment Company Institute numbers as of the end of April. Yet with mutual funds just slightly more widely used among advisors, according to the survey, the study also shows waning interest in mutual funds. While 50% of advisors indicate that they do not plan to decrease the choice of any investment vehicles in the next 12-months, 16% plan to decrease their use of mutual funds, while just 3% plan to decrease their use of ETFs.
Survey results also reflect an overall increased use of cash since 2006, when just 53% of advisors surveyed were using or recommending cash, compared to 79% in the latest survey. Advisors also seem to be moving away from annuities, with 41% currently choosing variable annuities, compared to a high of 58% in both 2006 and 2008. In addition, 29% of advisors surveyed say they currently use or recommend fixed annuities to clients, down from a high of 49% in 2010.
"The study seems to point to a shift toward investments with greater transparency and liquidity," says Valerie Porter, director of the FPA Research and Practice Institute, in a statement. "Perhaps advisors are responding to consumers' demand for lower cost investments that allow them to be more nimble in their investment approach. And I think it's safe to say everyone values cash a little more since last decade's market collapse."
Aaron Klein, CEO at Riskalyze, a technology provider in Auburn, Calif., developing analytics tools for advisors, observes that financial planners are less focused on fund type and more interested in tilting their allocations to a safe haven. "Advisor use of lower cost ETFs is growing tremendously, especially the funds from Charles Schwab and Vanguard, he says. With equity markets at their peak, bonds almost sure to drop over the next couple of years, and zero return on cash, advisors are struggling to find a safe haven to include in their allocations."
Commenting on the uptick in ETF use among advisors, Cullen Roche, an industry blogger and founder of Orcam Financial Group, a San Diego-based financial consulting firm, says: ETFs are going to eat the mutual fund world's lunch over the coming 20 years. Mutual funds are too expensive, too tax inefficient and too illiquid. Advisors whose models rely on these old products will likely lose business over time, he says, as more and more investors demand liquidity, tax efficiency, transparency and low fees.
Other key survey findings:
- Although 57% of advisors believe a blend of active and passive management provides the best overall investment performance - taking into account costs associated with each style, 30% of advisors are likely to have increased their use of passively managed funds over the last year, compared with 18% for than actively managed funds.
- The survey also shows that advisors maintain a positive long-term economic outlook, with 57% bullish for the next five years, compared to just 39% who are bullish over the next six months.
- Advisors expect inflation to rise over the next five years to more than 3%. They are primarily using equities as inflation hedges, although alternative investments such as REITs and commodities are also commonly used as hedges.
The study was conducted in March with input from 288 financial advisors of various backgrounds.
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