Advisers Seek Next Generation Active Investment Packaging

New data provided by Cerulli Associates, taken from the firm’s “U.S. Product Development 2017” publication, lays out financial adviser-based product demand in an increasingly model-driven environment.

Cerulli warns asset managers “need to better align their product development plans with how financial advisers construct portfolios.” Otherwise both asset managers and advisers will struggle to meet the evolving needs of clients on the ground.

“This includes their planned use of active and passive, investment vehicles, and asset classes,” explains Brendan Powers, senior analyst at Cerulli. “Our data shows that 58% of asset managers are currently offering asset allocations that consist entirely of their own underlying strategies.”

From a “capabilities standpoint,” Cerulli finds asset managers are most commonly looking to build out quantitative or strategic beta strategies to complement their active offerings. “These capabilities can be offered at a lower cost compared to active, with upside potential over the index,” Powers notes.

Powers states it is “imperative” for asset managers and advisers to be cognizant of where active has advantages over passive, for example in municipal bonds or emerging markets equity. On the other side, there are also instances where passive currently holds an advantage and likely will for some time, for example in large-cap U.S. equities.

“As advisers’ needs are changing, so must the product lines,” Powers adds.

Cerulli’s research shows more than half (55%) of advisers create customized investment portfolios on a client-by-client basis, while 42% start with investment models and alter on a client-by-client basis.

“For advisers using models in some capacity, 80% use internal models created by their practice, 68% use home-office models, and 66% use asset manager models at least sometimes,” Powers reports. “More than 80% of advisers agree that passive investments help to minimize overall portfolio fees and that active managers are ideal for certain asset classes.”

Other findings suggest advisers plan to use mutual funds less in 2019. Instead, they will use more exchange traded funds, collective investment trusts and separate accounts. Indeed, nearly 70% of asset managers that offer collective investment trusts feel they provide their firm with a large opportunity for future growth. Of those that do not offer the vehicle, 14% plan to build them out over the next 12 months.

“When asked about which client portfolio objective they are focused on, nearly all advisers (98%) report downside risk protection,” Powers concludes. “In another widespread trend, shifting to fee-based accounts has been a significant influence on lower-cost share class use for 63% of advisers.”

More information on obtaining Cerulli research is available here.