Displaying items by tag: AUM
The ETF industry has been undermining the mutual fund business for years, but it is now set to undergo a transformation itself. In particular, as many as half of the 2,000+ ETFs currently listed are likely to close in the next few years as they die off from a lack of assets. Most ETFs need to reach somewhere between $50m and $100m to break even, but currently more than half of the 2,100 or so ETFs have less than $100m. The problem is that the market has become so inundated with new concepts—and so top heavy from broad index funds—that attracting assets is very difficult. Accordingly, many ETFs, including from large providers, are likely to close over the next couple years.
FINSUM: Big names have already started shuttering funds that were underperforming in terms of assets. Expect more of the same.
It has been a decade in the making, but it finally, unceremoniously, happened. The AUM in passive investment vehicles, like ETFs, has finally overtaken that in actively managed ones, like mutual funds. As of August 31, money in passive funds totaled $4.27 tn, just a touch higher than the $4.25 tn in actively-managed funds. In a good summary of the overall change in landscape, the Wall Street Journal says “That shift lowered the price of investing for individuals, reduced the influence of stock pickers and turned a handful of Wall Street outsiders into the biggest power brokers in the industry”.
FINSUM: Every advisor reading this column knows exactly why this happened, but it is nonetheless a landmark moment. It is also perhaps a warning sign—which side is driving the market?
Wirehouse business may have gotten a boost from the demise of the fiduciary rule, but its decline has been uninterrupted for years. New data from 2018 is in and shows that wirehouses shed 5.7% of their client assets during the year. Advisor headcount also dropped by 403 advisors, brining the total to 54,030. According to the study, put out by Aite Group, “Wirehouses have steadily ceded market share from 2008 to 2018 … The segment has lost a total of 10 percentage points over that time period. As wirehouses continue to rationalize the size of clients they serve in advisory relationships, they also continue to see an outflow of advisors into other industry channels”.
FINSUM: RIAs and IBDs have been taking market share from wirehouses for years and the reasons why are obvious—better selling points for clients and better compensation. We think it is also a product of the demographics of the industry—as advisors get more senior and established the economics of going independent become more alluring.
The lone wolf financial advisor is steadily becoming a rarity in the wealth management industry (Edward Jones advisors aside!). For instance, 77% of Merrill Lynch advisors now report that they work in teams, up from 48% in 2013. Whether you work solo or in a team, one thing many might not know is that FA teams tend to grow their AUM and client base much faster than solo advisors. The advantage seems to be derived from two key aspects. The first is that a team has a wider variety of skill sets to help deliver comprehensive services to clients. The other is that having a team in place makes clients worry less about the impact of losing a single advisor via illness, death, or leaving the firm.
FINSUM: The team approach seems to be working across the industry, with clients liking the change. That said, forming teams comes with its own set of significant risks and considerations.
In what certainly seems to be a sign of health for the industry, RIA average account sizes just hit a new high. The average client at a US RIA now has an account averaging $2m (at firms with over $250m in AUM). This is the first time the figure has ever crossed the $2m threshold. Median AUM for firms grew over 16% in 2017, with average revenue increasing to $3.6m. The stats come from an annual Charles Schwab survey, with the firm saying about the healthy results “Firms are fueling their organic growth by differentiating and marketing their value propositions, improving the client experience and strategically expanding their service offerings to meet the needs of their ideal clients”.
FINSUM: The fiduciary duty of RIAs seems to be a differentiated and continued source of new client demand. It is a testament to the quality of RIAs in this country.