How BDs Should Respond to Shifting Advisor Preferences: Cerulli

Broker-dealer revenues remain under pressure as advisors increasingly prefer passive products, avoiding the revenue-sharing payments that asset managers have long depended on, Cerulli Associates reported Wednesday.

Cerulli said asset managers must make available portfolio elements that appeal to advisors’ needs for flexibility and products that emphasize lower cost and sustainability.

About a quarter of advisors across all channels create custom portfolios for each client, and some two-thirds of all advisors report that their primary portfolio construction influence comes from within their own practice. But as they face margin pressures and scale, advisors are becoming increasingly conscious of the price they pay for access to investment strategies.

“Cost plays a significant role in advisors’ investment decisions, placing greater pressure on managers to ensure active strategies are priced appropriately to compete with passive options,” Matt Belnap, associate director of retail distribution at Cerulli, said in a statement.

An Evolving Industry

According to the report, mutual funds are still the most widely used product vehicle for advisors, but asset flows will decline over the long term as allocations to ETFs continue to increase. The research estimates a 13% decrease in advisors’ use of mutual funds (including liquid alternatives) by 2024 and a 7% decline in use of variable annuities. By then, ETF use will have grown by 16%.

Advisors affiliated with insurance broker-dealers anticipate the largest reduction in mutual fund use — 14% — over the next two years, and a 20% increase in ETF use. As other strategies such as direct indexing grow in popularity, advisors’ use of separate accounts is expected to grow as well, the report said.