Charles Schwab Investment Management (CSIM) released “At the Core: Adviser Views on Investment Trends,” a new study of 381 US independent advisers with at least $50m (£38.1m) (€43.8m) in assets under management, who have traded an ETF in the past month for an account they manage.
On average, advisers said 62% of clients’ holdings should be allocated to core investments. More than one-third of advisers (38%) believe core investments have an even bigger place in client portfolios, saying that core should make up 70 – 100% of holdings.
Crucial building blocks
Marie Chandoha, chief executive of CSIM: “An investor’s core holdings are the foundation of their investment portfolio, and independent advisers are focused on finding low-cost, straightforward products for their clients to serve as those crucial building blocks.
“Our industry has a reputation for selling products that can be too expensive and complex, but advisers are continuing to advocate for simplicity, transparency and choice in client portfolios.”
When it comes to the investment vehicle of choice at the core of a portfolio, advisers said ETFs make up the largest portion of their clients’ core holdings. Looking ahead, 69% of advisers said they would increase their clients’ core allocation to ETFs in the next five years.
Advisers said that economic and market events impact how much of a portfolio should be allocated to core holdings.
Around half of advisers said that tax reform (54%), a rise in the federal funds interest rate (51%) and market volatility (48%) would drive a greater allocation to core.
Also, the majority of advisers (86%) said a clients’ level of wealth impacts how much of their portfolio should be allocated to core holdings.
Advisers were split on what that threshold is, with 46% saying “mass affluent” clients (those with $100,000-$249,999 in investable assets) should allocate more of their portfolio to core holdings than “high net worth” clients (those with more than $1 million in investable assets), and 40% said the opposite.
Some 66% said that total cost is the most important consideration when choosing any index fund, whether it is a mutual fund or ETF.
Advisers said that when deciding between two funds that have the same investment objective and price, they look to performance history (58%), track record (49%) and an asset manager that provides great portfolio construction education and guidance (37%).
Few advisers chose a fund’s brand name (16%) as an important factor in deciding between two funds.
Jonathan de St Paer, president and head of strategy and product for CSIM: “Independent advisers are focused on choosing the best products to achieve their clients’ goals without unnecessary costs or onerous minimum investment requirements. Advisers are a bellwether for the investing industry at large, which is heading toward greater access and affordability.”
When it comes to mutual fund investing, more than half of advisers (58%) said that low or no minimums are very important when considering a fund.
Around 45% of advisers said mutual funds should have a single share class, accessible to all.
Also, the report found half of advisers believe everyone should have the same access to the same lowest-cost funds, regardless of how much they have to invest.
Primary investment vehicle
More than half of advisers (52%) said ETFs are already the primary investment vehicle in client portfolios and even more (64%) said that ETFs will be the go-to investment type in client portfolios in the future.
Mutual funds are important to advisers, with 41% saying mutual funds are the primary investment vehicle they use today.
Around 50% have already put some client investment portfolios (excluding cash) entirely in ETFs and about the same (48%) have put some of their client portfolios entirely in mutual funds, and the report found this was more so with Millennial advisers (60%) and female advisers (57%).
Looking ahead, more than a quarter (28%) of advisers surveyed said they will consider all-ETF portfolios within the next five years.