A majority of the respondents, 70 percent, said it was very important for them to be able to trade ETFs on behalf of their clients without commissions or fees.
Most of the respondents believe that a client’s net worth should dictate how much of their portfolio is allocated to core holdings, but survey participants were split over whether lower-asset clients should have a higher proportion of core holdings or if high-net-worth and ultra-high-net-worth clients should have more of their assets in a portfolio’s core.
Active strategies still have a slight edge over their passive counterparts, accounting for 51 percent of the core holdings reported by the survey participants.
Yet when Schwab asked about what kind of funds advisors were using throughout an entire portfolio, 60 percent of advisors responded that they were using smart beta products. The most commonly used factors, by proportion of respondents using them, were growth, quality and value. The least commonly used smart beta strategies were momentum, fixed income factors and equal-weighting.
When asked about which factors they use to select funds for a client portfolio, the most influential consideration is total cost, meaning the combination of commissions, expense ratios and bid-ask spread. The ability of a product to track an index, reputation of the fund provider and exposure to a particular part of the market were also listed as important considerations.
“Price matters, and price has effects across the history of an investment portfolio,” said Jonathan de St. Paer, president of Charles Schwab Investment Management. “What matters if price is off the table? They’re looking at track record, performance, tracking error and spread.”
Market, economic and policy events may change how advisors think about the cores of client portfolios moving forward, with more than half of the respondents reporting that they would allocate more to a portfolio’s core due to tax reform and the Federal Reserve’s policy of interest rate increases.
Finally, Schwab also asked about behavioral finance issues and the biases respondents most commonly saw reflected in client behaviors. The most commonly encountered behavioral bias was availability bias, cited by 76 percent of respondents. Availability bias involves using the most available information to make decisions without doing any analysis.
Confirmation bias was cited by 75 percent of the respondents. Confirmation bias refers to seeking information that supports an investment decision that was already made while ignoring negative information.
Loss aversion, the emotional fear of assets losing value that can prevent an investor from embracing opportunities, was cited by 72 percent of the survey participants as a behavioral bias present in their clients.