Investors are turning to low-cost options more and more, according to Cerulli's latest release of its annual coverage of retail investor product use in the U.S.
This preference is a contributing factor to other trends that Cerulli is tracking, most notably the growth of the direct channel, and also of independent advisor channels.
After hitting a low of $8.8 trillion in assets in 2008, overall open-end mutual assets reached their highest levels-topping $11 trillion by the end of the first quarter of 2012. Although there was a positive start to 2012, investors remain skeptical of the overall health of the U.S. economy. In 2011, open-end mutual funds experienced net redemptions in excess of $72 billion. This is, however, an improvement over a loss of $267 billion in 2010 and $143 billion in 2009.
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"The mutual fund redemptions were not simply a result of reduced interest in investing overall, but investors expressing a preference for lower-cost offerings in general, and ETFs specifically. ETFs gathered inflows of nearly $112 billion in 2011. These figures reflect a growing reluctance by investors and advisors to pay for what they believe to be broad market returns," said Scott Smith, head of Cerulli's intermediary practice.
As a result, among the largest funds, assets are leaving traditional active managers and flowing to lower cost providers, such as Vanguard. Among the 25-largest equity mutual funds, the six Vanguard funds experienced inflows of more than $11.7 billion during the first quarter of 2012, while the 19 other funds lost more than $15 billion in the same period.
"We expect fund flows to be chiefly populated by low-cost providers with core offerings, while active managers pursue alpha in complementary asset classes," said Roger Stamper, analyst and contributor to this research.
Further evidence of investors' changing preferences is seen in the growth of the direct and independent advisor channels. Over the last three years, direct-to-investor assets have grown slightly faster than advisor-intermediated assets.
It was previously assumed that traditional advisory channels would be the major beneficiaries of the retirement of Baby Boomers. To address this opportunity, direct advice providers, many of whom also maintain robust retirement plan recordkeeping platforms, have increased their focus on creating long-term investor relationships, including providing advice on retirement income.
As a result, investors have become more likely to convert their retirement plan assets to IRA accounts at the same provider after their separation from service. To reverse the inertia of staying with a known provider, traditional advisory firms must be able to demonstrate some tangible evidence that their services provide more beneficial client outcomes than their competitors.
Cerulli also attributes growth in the direct channel to investor distrust of their financial providers. More than 73 percent of investors are either ambivalent or feel that financial firms do not look out for their best interests.
"Even though we expect continued growth in the direct channel, there is also strong movement within the advisory channels that illustrate investor preferences. The independent channels have experienced growth as high as 34 percent over the past 3 years. While this growth is largely being fueled by advisors' desires to operate their practices as they feel best suits them, the desire by investors for objective advice is certainly a contributing factor," Smith said.
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