Advisers resist upping passive exposure

Active funds remain advisers’ top product of choice when building portfolios after research found more than half invested less than 20% of client money into passive funds.

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According to research by Platforum, large advisory firms are more likely to recommend passives than their small firm counterparts but passives have not yet become the dominant type of fund.

While only 6% of advisers admit to having no passive exposure for clients, more than half of advisers invest 20% or less of clients’ portfolios in passives and fewer than one in seven advisers (15%) invest more than 50% of clients’ portfolios in passives, the research found.

It follows a boom in flows to passive vehicles over the last 18 months.

Within the passive world advisers also appear unwilling to recommend ETFs to clients after fresh research found just 1% of assets on adviser platforms were held in the vehicles.

About 10% of assets on platforms were held in passive funds, but tracker funds accounted for 9% with ETFs raking in just 1%, according to research by Platforum.

Direct investors hold a higher proportion in ETFs, 3% against 5% held in trackers, suggesting personal investors are more likely to accept the higher risk of the funds.

Platforum suggested advisers were using passive funds to diversify client portfolios but were avoiding ETFs due to the higher cost of holding them and the apparent heightened risk.

Research director Miranda Seath, said: “Advisers continue to use tracker funds more extensively than ETFs. Our research suggests that advisers are using tracker funds as building block funds in portfolios to bring down the cost of investing or for diversification. Most advisers are blending active and passive funds within portfolios.

“We have seen little year-on-year increase in ETFs on platform. Many advisers continue to see the ETF structure as higher risk than mutual funds, citing liquidity concerns as a barrier to investing.”

Potential platform problems

Cost seems to be a major barrier.

On five of the 15 direct platforms it is cheaper to hold a portfolio of ETFs than a portfolio of funds, Platforum found, but for adviser platforms it is either more expensive or costs the same to hold a portfolio of ETFs rather than funds.

Higher trading costs for ETFs on platforms was also cited as a barrier by 29% of advisers.

However, Seath added that times were changing and platforms were taking steps to improve ETF functionality.

“There is no difference in transaction costs between ETFs and funds on 7IM, Alliance Trust Savings, AJ Bell Investcentre, Ascentric, and Raymond James,” she said.

“Novia, Hubwise and Allfunds, the largest European platform, now offer fractional trading of ETFs: helpful for investing smaller, regular amounts into ETFs or for portfolio re-balancing. And Aegon will make ETFs available to former Cofunds users this year with Old Mutual Wealth following suit once it re-platforms.

“Indeed platform issues appear to be less important to advisers in 2017 than in 2016: 50% of advisers now see no barrier to investing in ETFs on platform.”


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