A survey released today shines a light on the index investing habits of financial advisers and wealth managers: how and why they are using ETFs and index mutual funds, as well as how they are reacting to regulation and technological change.
UK wealth managers are taking an active approach to index investing, according to a BlackRock-commissioned survey from KPMG.
The survey by KPMG, and commissioned by BlackRock, the parent of exchange-traded funds issuer iShares, included quantitative and qualitative interviews with over 130 UK financial advisers, wealth managers and private bankers, who collectively oversee over £4.5 trillion of client assets.
Tim West, Head of Asset Management Consulting at KPMG UK, said: “This survey aims to fill a gap by providing insightful data and observations on how UK wealth managers use index products and why. The market for index products has exploded in recent years, and the findings help to uncover the drivers influencing this growing segment of the market and make an educated projection about what the future might hold for index products in the UK.”
Eight key findings from the research
- Not a case of either or
While some firms offer portfolios made up of 100% index products, the survey shows many investors are happy to combine active and index products to deliver the best outcome for a portfolio – using index products both strategically (where active managers do not deliver sustainable alpha) and tactically (to achieve specific exposures quickly).
- How much will regulation drive usage of ETFs and index products?
Regulation is top of mind in the UK wealth industry, with 55% of respondents highlighting it as a critical driver of change over the next two years.
Discretionary fund managers and private bankers noted that MiFID II will likely lead to an increase in price transparency and consequently greater scrutiny of the costs of the underlying portfolio. This may result in more use of index investing products.
- Which is more widely used: ETFs or index mutual funds?
It depends who you ask – while financial advisers are more likely to use index mutual funds (70% do), the survey highlighted that two thirds also use ETFs. This is a very high number given ETFs are yet to be universally available across platforms. All of the private bankers surveyed use ETFs, and 86% of wealth mangers currently use them to benefit from the liquidity and tradability that ETFs offer.
- Is index investing an equities-only phenomenon?
Nine in 10 (94%) use equity index products, while 60% use them for bond exposures. Investors are commonly using index tracking funds in areas of the bond markets where they believe it is more challenging to generate alpha, such as short duration and inflation-linked bonds.
Financial advisers are the most prolific users of bond indexing products, while wealth managers often use fixed income indexing products so they can access multiple exposures with a range of durations rather than having to buy a basket of individual bonds. Looking ahead, investors across the board pointed to a demand for more innovative ways to weight fixed income index products.
- Not all about TER
For three quarters of investors (73%) cost is the driving factor for picking a particular index product, but the research showed that more sophisticated investors tend to focus on the ‘Total Cost of Ownership’, which aims to take ongoing charges as well as entry and exit costs into consideration.
- Is smart beta considered a fad?
The survey suggests there is interest in smart beta strategies. A third of investors are using smart beta in their client portfolios, with value and dividend strategies the most popular. Those that do not point to a desire to see a longer track record and more attractive pricing before they invest.
- Will robo advice replace traditional portfolio construction?
Interviewees generally believe robo advice or digital wealth managers will complement rather than replace traditional methods of portfolio construction.
Although in its infancy, surveyed firms are building two different robo propositions: financial advisers are leading the way in building tech-enabled interactions with clients and automate portfolio construction, while private bankers are more excited about the potential to use robo propositions to package more sophisticated trading strategies for clients that don’t necessarily work in a mutual fund structure.
- Will investors’ use of index products increase or decrease?
Investors polled commonly invest up to 10% of a typical portfolio in index strategies. Many saw 30-40% of a multi-asset portfolio held in index products as a natural ceiling. Against this backdrop it is no surprise that 39% of users of index products plan to increase their allocation in the next two years. Half of respondents with over 10% AUM invested in index products plan to increase their allocation over the next two years.
Joe Parkin, Head of iShares UK Retail and Wealth at BlackRock, commented: “With the UK wealth industry undergoing significant change as a result of technology, changing regulation and fee pressure, advisers and wealth managers are at a crossroads. Our clients acknowledge that every investment decision is an active one, and want to know how to achieve the best net-of-fee performance for their clients. ETFs and index products will continue to play a key role in building these targeted and cost effective portfolios, and our priority remains providing the support and insight necessary throughout this journey.”