Shifting Adviser Preferences Transform Broker/Dealer Revenue

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.  

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.”