Dimensional Fund Advisors LP in Austin, Texas, increased its individual investor assets almost 11-fold in the past decade while selling through RIAs. That vaulted the firm to 10th- largest among mutual fund and ETF families at the end of 2010 with $127 billion, according to Financial Research Corp. in Boston. The company didn't appear in FRC's top 25 in 2000.
The growth of fee-based advice has benefited ETFs because they tend to be low-priced, tax-efficient and easily traded. RIAs allocate an average of 16% of their clients' assets to ETFs, more than double the proportion among other advisors, according to Cerulli.
"You can get into the index areas that you want and create an efficient portfolio," said Kent Addis of Addis & Hill Inc., an RIA in Wayne, Pa., a Philadelphia suburb. All of his firm's $30 million in assets under advisement is in ETFs, almost half with Vanguard. Addis uses funds that invest in major stock and bond indexes, as well as U.S. Treasuries, high-yield debt, emerging-market equities and gold.
ETF Surge
ETF industry assets in the U.S. surged 15-fold to $992 billion in the decade ended Dec. 31, data from the Investment Company Institute in Washington show. Stock and bond mutual funds rose 76% to $9.01 trillion in the same span, according to the trade group. Vanguard, with more than $35 billion in ETF deposits in 2010, is the fastest-growing provider of the product.
The link between advisor compensation and ETF growth will be underscored over the next 5 to 10 years outside the U.S., said Scott Burns, director of ETF research at Chicago's Morningstar Inc. Regulators in the U.K. have barred payments from fund and insurance companies to financial advisors for recommending their products starting in 2013. Australia passed a similar ban effective next year.
"We definitely see ETFs being embraced more because of this," Deborah Fuhr, BlackRock's global head of ETF research, said in an interview from London. "We're already seeing firms launched to help financial advisors select ETFs."