Advisors are turning away from equities and moving into alternative investments and ETFs as the investing landscape continues to shift dramatically, according to a recent white paper by technology platform provider Advyzon.
By the end of last year, advisors had invested 2.7% of their clients' assets into alternative investments, which is up significantly from the 0.6% the year before, according to the white paper.
Meanwhile, equities continue to trend downward as by the end of 2022 advisors only had invested 53.7% of their clients’ assets in stocks, which was down from more than 60% the year prior.
Chicago-based Advyzon, which offers technology platforms and portfolio management solutions to the financial advisor community, anonymously collected information from its more than 1,200 advisor customers. It published that data as part of its white paper entitled “The New Diversification: Asset Allocation Into 2023.”
Fueling the push into alternatives was the down markets last year in both equities and bonds.
“It really shocked a lot of people, retirees in particular, who had bond-heavy portfolios and expected that the bond portion of their portfolio was relatively safe,” said Brian Huckstep, chief investment officer at Advyzon Investment Management (AIM), an Advyzon-owned TAMP. “Some shellshocked people are looking for other choices [and] talking to advisers [about] adding things to their portfolios.”
Those choices turned out to be alternatives investments, he said. It has been a slow process, but alternative investments have gone from an outlier to a viable option in an investor's portfolio, Huckstep pointed out. Years ago, products such as private equity, currency, and real estate were only accessible to institutional clients. That has changed over the years.
“Slowly, over time, product manufacturers have done a fantastic job—driven by capitalism and drive by the desire to sell product … to move these things into the hands of the day-to-day retail investor for better or for worse,” Huckstep said.
Despite alternative products becoming more retail and the additional regulatory scrutiny, alternative investments still carry with them a certain level of uncertainty that advisors have to be wary of, Huckstep explained.
“There's a lot of risk out there,” he said. “Some of them are very expensive, some of them are dangerous and … we do need to be careful there [because] it's not always rainbows and butterflies with alternatives.”
The white paper also illustrated the continuing shift advisors are making from mutual funds to ETFs. Advisors had almost 29% of their clients' assets in ETFs by the end of last year, the white paper found. This was about the same level as the year before.
However, for mutual funds, the market share continues to decrease, as advisors had 24% of their clients’ assets in mutual funds at the end of 2022 as opposed to 30% of the assets by the end of 2021.
The primary reason ETFs have been growing in popularity is due to their lower costs, according to the paper. No matter if it is an actively managed strategy or a passively managed one, the costs of ETFs are always lower, according to Huckstep.
“It’s not just a case of an active versus a passive thing, it is a mutual fund versus an ETF,” he said. “ETFs are just less expensive.”
Those lower costs have been driving advisors more to ETFs as they look for ways to keep costs down for their clients, according to Huckstep.
“The fiduciary really needs to do what’s right for their clients and that drive has really pushed advisors to spend some extra time and attention and energy on the effort to get fees down,” he said.
Despite the ongoing trend, Huckstep does not believe that mutual funds’ days are numbered. In fact, he said, they still do hold some advantages over ETFs. One way is in their disclosure obligations, particularly with actively managed funds.
Mutual funds only have to disclose their holdings once a quarter while ETFs need to do so more frequently. That means a manager can protect their investment strategy more in an actively managed mutual fund than an actively managed ETF.
“If you’re an active manager who has the secret sauce for investing and you don’t want people frontrunning your trades, you do that in a mutual fund,” Huckstep said.