Broker-dealers are facing a tough future as advisor look for lower cost investment options that do not involve sharing fees with an asset manager, according to Cerulli Associates, a research and data provider for the financial industry.

Advisors are looking more to passive products that do not require input from a broker-dealer, which avoids the advisors paying the revenue-sharing payments that they have depended on in the past Cerulli said. Broker-dealers are going to have to adapt to this changing market if they are to remain profitable, the Boston-based organization said.

If broker-dealers are to continue to succeed, they will need to cater to the desires of advisors, the research said.  

Asset managers will need to make separately managed accounts, exchange-traded funds, environmental, social, and governance-oriented products, and other portfolio elements that appeal to advisors’ needs for flexibility and products emphasizing lower cost and sustainability, Cerulli said in a new report.

“Across all channels, approximately one-quarter of all advisors create custom portfolios for each client and nearly two-thirds of all advisors report that their primary portfolio construction influence comes from within their own practice,” Cerulli said. “However, as advisors confront margin pressures and scale, they are becoming increasingly conscious of the price they pay for access to investment strategies.”

This pressure will prompt advisors to become rely less on broker-dealers unless those broker-dealers can make products available at attractive prices.

“Cost plays a significant role in advisors’ investment decisions, placing greater pressure on managers to ensure active strategies are priced appropriately to compete with passive options,” Matt Belnap, associate director at Cerulli, said in a statement.

Mutual funds remain the most widely used product for advisors but ETFs are gaining ground.

“The industry is evolving. Advisors across all channels are shifting their investment allocations away from mutual funds and their associated revenue-sharing payments and toward ETFs,” Belnap said.

The Cerulli  research also projects a growing demand for separately managed accounts,

“Asset managers, particularly those targeting high-net-worth investors, should develop strategies that will be available in a separately managed account wrapper as clients down-market will display an appetite for the product structure,” Belnap added.

In addition, broker-dealers will need to cater to advisors who are focusing on high net worth clients, women, and younger clients. These clients often provide the greatest opportunity for ESG product adoption, as the clients in these demographics typically have been higher adopters, Cerulli said.

“Looking forward, managers should consider a vehicle-agnostic approach to asset gathering in the retail channel, considering changing demographics and evolving demand for customization,” Belnap said.