A combination of regulatory pressure and rising cost consciousness is driving growth in passive products over actively managed products in the U.S., which is posing an increasing challenge to the asset-management industry, according to a new report from Boston-based research firm Cerulli Associates.
The report, issued on Wednesday, indicates that the shift to low-cost investing in the U.S. is impacting asset-management firms more than financial advisors. That shift stems both from concerns about cost in a low-return environment, and the regulatory climate, the report suggests.
For example, the report says that due to “increasing regulatory pressure,” 45% of advisors say they plan to increase their allocations to ETFs, 27% plan to decrease allocations to actively managed funds and 32% plan to decrease their use of variable annuities.
In addition, the report suggests that, “Cost is the most important driver in advisors’ decisions about passive ETF use,” and that most advisors choose the lower-cost option when comparing two ETFs that track the same index.
“Advisors are somewhat insulated” from this shift to ETFs, the report notes, “because they can incorporate [ETFs] into clients’ portfolios without significant loss of management fee revenue.”
However, the Cerulli report suggests that’s not the case for asset-management firms as many are feeling a direct impact on their revenue and profitability.
“Asset managers are attempting to stem the negative impact on revenue that outflows from active products to exchange-traded funds are having on business,” the Cerulli report states. “However, most find it difficult to differentiate themselves and build scale in such a crowded market.”
At the same time, advisors are also feeling the impact of the evolving regulatory environment, the report notes, as advisors prepare for the implementation of the U.S. Department of Labor’s new fiduciary duty rule.
“This rule may result in changing investment products, vehicles, or account types advisors choose for clients to alleviate any appearance of conflict of interest or negligence of their fiduciary duty to clients,” says Emily Sweet, senior analyst with Cerulli, in a statement.
“Asset managers must be aware of the impact these reassessments will have on their partnerships with advisors, knowing that the new regulatory environment encourages advisors to make changes where the most obvious risks exist,” she adds.
These trends may ultimately lead to more consolidation among asset managers, broker dealers, and advisors, the Cerulli report suggests.
“Asset managers may combine to build market share and protect profitability. Smaller [broker/dealers] may consolidate to produce fewer entities that operate more efficiently,” the report says, adding that “consolidation among advisors through teaming can deepen service offerings to clients and allow cost savings in meeting regulatory requirements.”
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