The Nuances of FAs' Shift to Passive
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Wednesday, September 26, 2018

The Nuances of FAs' Shift to Passive

Though ETFs continue to gain market share, financial advisors are not abandoning traditional active mutual funds (at least not yet).

Michael Kitces
Pinnacle Advisory Group
Partner, Director of Wealth Management
So argues Michael Kitces, partner and director of wealth management at Pinnacle Advisory Group and Nerd's Eye View blogger, in a guest column this week in Financial Planning. Digging into the Financial Planning Association's (FPA's) 2018 Trends in Investing Survey Erdos & Morgan's 2017 Financial Advisor Media Outlook and Usage Study, Kitces questions the conventional wisdom that FAs are pulling lots of money out of active funds and putting it into ETFs.

Kitces notes that, per the FPA's survey, this year 73 percent of FAs are currently using or recommending mutual funds (outside of wrap programs), down from 80 percent in the past two years and from about 85 percent in 2006. Over the same 12 years, ETF use has risen from 40 percent of FAs (in 2006) to 87 percent (in 2018). So mutual funds have slipped, sure, but not as far as ETFs have risen. Other investment options have ceded market share in that time frame: individual stock use fell from more than 65 percent (2006) to 56 percent (2018); individual bonds from 60 percent (2006) to 46 percent (2018); mutual fund wrap programs from just under 40 percent (2006) to 32 percent (2018); and fixed annuities from more than 35 percent (2006) to 26 percent (2018).

Yet the biggest sufferers during ETFs' rise seem to be variable annuities, which slipped from nearly 60 percent use rates in 2006 and 2008 to 28 percent in 2018. So ETFs are stealing a little market share from a variety of different investment vehicles ... and a lot of market share from VAs.

Digging deeper, Kitces notes that the vast majority (65 percent) of FAs surveyed by the FPA believe in neither active nor passive alone; they think the best performance comes from blending active and passive. On the flip side, only 12 percent favor active alone, while 22 percent favor passive alone.

Of course, active mutual funds had most of the assets when ETFs started gaining popularity, so ETFs' rise did mean a shift in assets and thus a dramatic difference in flows. Yet perhaps this data suggests that that shift will not continue indefinitely. Once advisors have the active-passive mix they want, the flows dynamic may change again.

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