Advisers to Shift From Traditional Investment Vehicles

In fact, fewer than two advisers in 10 anticipate increasing their use of open-end mutual funds and the mutual fund share of the product pie will drop from 35% to 31%, Cogent Research said, in a press release about the study. On average, advisers say they will remain loyal to six primary mutual fund providers and that the two mutual fund providers most used today, American Funds and Franklin Templeton, will maintain their market share at the end of 2009.

Advisers are expanding their use of various investments, searching for the best vehicles for individual client needs while also enhancing their own revenue channels by buying and recommending investment products that serve clients well and can be executed within the growing fee-based environment. Fees based on AUM will comprise the majority of income for most advisers, Cogent predicts, and this will influence their product selection. However, the trend of increasing the use of more sophisticated products, which might be a better fit for a complex client need, is tempered by the ability of the adviser to explain these complex products to clients.

Products expected to see the most dramatic increase in market share resulting from this movement away from traditional mutual funds include separately managed accounts (SMAs) and exchange-traded funds (ETFs) due to their tailored asset management features and ability to allow investors to allocate across sectors and indexes. ETF growth is being driven by specialized use among advisers focused on wealth management.

Investments that will not see significant growth include closed-end funds, hedge funds, and variable annuities. Closed-end funds, although they will continue to have their niche appear to some advisers, will only occupy a small segment of adviser AUM. Hedge fund use will also remain limited. Variable annuities will not see much growth in the market either, but Cogent contends this will be a result of existing adviser compensation structure and negative perceptions and not resulting from product attributes – despite an environment that should favor their features.

“Advisers are in a unique position to not only observe and evaluate trends in asset management products and accounts, but also to gauge their clients’ evolving receptivity to traditional versus new investment options. The actions of advisers show a marked, definitive shift in product selection in the coming two years,’ according to Bruce Harrington, managing director, Cogent Research. “How can financial services companies respond to these clear needs by advisers? Improve loyalty ratings. Build brand. Increase innovation and communicate greater product differentiation. Advisers will respond to those firms and products that can execute on these themes.’

The Advisor Product Forecast was conducted between September 21 and October 30, 2007 and surveyed a representative cross section of 1,266 U.S.-based advisers, each with an active book of business of at least $1 million, and who offer investment advice or planning services to clients on a fee or transactional basis. The product spectrum researched included: open-end mutual funds, closed-end funds, SMAs, ETFs, fixed and variable annuities, individual securities, fixed index annuities, hedge funds, and life insurance.