Data & Research March 15, 2023

Shifting Adviser Preferences Transform Broker/Dealer Revenue

Advisers gravitate toward ETFs, SMAs, ESGs and products emphasizing flexibility, sustainability and lower cost. 

Reported by


Research from Cerulli Edge, part of Cerulli Inc., strongly recommends that broker/dealers respond to shifting adviser preferences. Advisers have gravitated toward exchange-traded funds, separately managed accounts and environmental, social, and governance-oriented products. Portfolio elements providing flexibility, sustainability and lower cost were also attractive to advisers. 

The findings come from Cerulli Edge’s U.S. asset and wealth management edition examining broker/dealer trends. Advisers have steered away from revenue-sharing payments, which asset managers have long relied on, in favor of passive products instead, marking a transformation for broker/dealer revenue.  

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Advisers are expanding ETF allocations, as asset flows through mutual funds have seen a long-term decline, according to the research.  

“The industry is evolving. Advisers across all channels are shifting their investment allocations away from mutual funds and their associated revenue-sharing payments and toward ETFs,” said Matt Belnap, an associate director at Cerulli Edge, in a statement.  

SMAs have also received growing demand. The report said SMAs give advisers the benefit of customization, while outsourcing trading to an asset manager or overlay manager. 

“Asset managers, particularly those targeting high-net-worth investors, should develop strategies that will be available in the SMA wrapper as clients down-market will display an appetite for the product structure,” Belnap said. 

High-net-worth, female and younger clients have typically been high adopters of mission-oriented investments. Advisers serving these clients have the greatest opportunity for ESG product adoption. 

“Looking forward, managers should consider a vehicle-agnostic approach to asset gathering in the retail channel, considering changing demographics and evolving demand for customization,” Belnap said.  

The report indicated that approximately one-quarter of advisers create custom portfolios for each client. For almost two-thirds of advisers, portfolio construction influence comes from within their own firm. According to Cerulli, broker/dealers should create model portfolio offerings that give advisers more time to acquire new clients and run their business.  

Advisers are increasingly wary of the price for access to investment strategies. The report suggested that asset managers should adjust product and pricing to relieve problems of margin pressures and scale facing advisers.  

“Cost plays a significant role in advisers’ investment decisions,” Benlap said.  “Placing greater pressure on managers to ensure active strategies are priced appropriately to compete with passive options.”  

Compliance March 15, 2023

LinkedIn Will Pay Out $6.75 Million for 401(k) Participant Complaint

The firm was hit with a complaint for allegedly keeping a Fidelity fund without moving to options that were less expensive for investors.

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LinkedIn Corp., which is owned by Microsoft Corp., settled for $6.75 million a 401(k) excessive fee complaint made in August 2020, according to court filings.

The social media company settled over allegations made by participants of its 401(k) profit-sharing plan and trust that it did not try to reduce plan expenses or scrutinize investment options closely enough within the plan, according to a settlement agreement filed on March 3 in the U.S. District Court for the Northern District of California.

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Any participants in the plan from August 14, 2014, through July 1, 2020, are subject to payouts from the settlement, according to filings in the case overseen by U.S. District Judge Edward J. Davila. The amount paid to each participant will be determined by an allocation plan depending on each participant’s investment, the filing said. Under the terms of the settlement, there are no findings, admissions or “suggestion of any wrongdoing or liability by any defendants.”

“This is another in a growing group of lawsuits in which the plaintiffs allege that plan fiduciaries imprudently chose funds with excessive fees as investment options under a 401(k) plan,” Andrew Oringer, partner and general counsel with the Wagner Law Group, wrote by email. “The plaintiffs and their attorneys have an interest in settling in that the chance of actually prevailing on such a fact-sensitive claim is generally speculative at best. A bird in the hand is worth two in the bush, so to speak.”

The plaintiffs, Douglas G. Baily, Jason J. Hayes and Marianne Robinson, had alleged that the plan managers for assets as high as $817 million had not used their “substantial bargaining power” to utilize the lowest fees and expenses for participants’ investments.

The plaintiffs alleged in part that LinkedIn’s plan administrators failed to use the lowest-cost share class for many of the mutual funds in the plan and failed to consider certain collective investment trusts available as lower-cost alternatives to the mutual funds.

The plaintiffs called out the Fidelity Freedom Funds target-date fund series in their complaint. They alleged that LinkedIn should have considered a cheaper, index-linked version, as opposed to an actively managed one, among other potential lower-cost options that would have saved participants millions of dollars.

They also alleged that the plan had conflicts of interest, because Fidelity was the both the recordkeeper of the retirement plan and the asset manager for the fund series. This placed Fidelity “in positions that allowed them to reap profits from the plan at the expense of plan participants,” the complaint alleged.

“One way to look at litigation like this is that it encourages compliance,” Oringer wrote. “A contrary view is that the litigious nature of the today’s U.S. retirement setting results in an unfortunate waste of time, effort and money on employers and administrators just trying to offer employees a 401(k) plan.” 

Neither LinkedIn nor Fidelity responded immediately to request for comment on the settlement.

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