Financial firms’ adoption of client-facing digital planning and asset allocation tools are also responsible for some of the flows, says Polefrone.
“Independent broker-dealers are adding robo-advisors for smaller accounts and for millennial-type investors,” Polefrone says. “That’s the kind of product that lends itself to more ETFs and passively managed funds because they focus more on fee structure.”
Net new flows for long-term mutual funds increased by 1.2 percent, or $84.7 billion, to $7.4 trillion of assets from third-party financial intermediaries. Of that total, $30.6 billion, or 36 percent of the increase, came into passively managed mutual funds.
RIAs, which already have 33 percent of their assets in passively managed products, experienced virtual no change in total mutual fund assets in the first half of 2016 and a 2.4 percent increase in ETF net new assets.
Polefrone says that RIAs proportionately lower flows into passive products are mostly due to their early adoption of index mutual funds and ETFs.“They have been making this move over a longer period, so there hasn’t been as big a move for them on a percentage basis.”
Discount brokerages, another channel which pioneered passive products, were also up slightly in net mutual fund and ETF assets. Discount brokerages like Schwab and Vanguard account for 55 percent of the assets held in passive products.
The wirehouse channel is beginning to follow RIAs and independent brokerages into passive products, albeit slowly. According to Broadridge, $21 billion of wirehouse assets flowed out of actively managed funds, but assets in passively managed funds and ETFs increase by just $5.2 billion. As a result, wirehouses experienced net outflows of long-term funds of $13 billion in the first half of 2016, losing overall market share to other retail channels.
“It appears that they are losing advisors and clients to RIAs, which are growing significantly, or to independent broker-dealers, which continue to chug along,” Polefrone says.
Net new assets of passive products for the retail channels increased across categories like U.S. large-cap equities, U.S. mid-cap equities, and U.S. fixed income, while net new assets of active products increased across U.S. fixed income, high-yield income and U.S. municipals. Net new assets of active products decreased for U.S. large-cap equities, U.S.mid-cap equities and U.S. small-cap equities.
“We’re seeing an upward movement in passive, core, U.S.-based products, and a downward outflow in their active counterparts,” Polefrone says. “It seems to be a repositioning. At the same time, in fixed income, there are certainly those who believe that active management still works best.”