More than half (55%) of the respondents to the Index Investing survey said regulation will be a critical driver of change in the industry over the next one or two years.
Passive strategies look to set to benefit from the increased regulatory scrutiny that will come as a result.
Discretionary fund managers and private bankers said Mifid II will likely lead to an increase in price transparency and may result in a push towards index investing products rather than more expensive actively-managed options.
The survey found 70% of financial advisers are already using index mutual funds and are likely to continue and despite ETFs not being universally available across platforms, two-thirds of financial advisers still use them.
All of the private bankers surveyed use ETFs, and 86% of wealth mangers currently use them to benefit from the liquidity and tradability that ETFs offer, the report said.
Joe Parkin, head of iShares UK retail and wealth at Blackrock, said: “With the UK wealth industry undergoing significant change as a result of technology, changing regulation and fee pressure, advisers and wealth managers are at a crossroads.
“ETFs and index products will continue to play a key role in building these targeted and cost-effective portfolios, and our priority remains providing the support and insight necessary throughout this journey.”
Costs remain a huge driver
Costs are already a major concern with three quarters of investors (73%) stating it as the main reason for choosing a particular index product.
The research revealed that many investors tend to focus on the ‘total cost of ownership’, which aims to take ongoing charges as well as entry and exit costs into consideration.
Of those already invested in index and passive products, 39% told the survey they planned to increase their allocation in the next two years.
Tim West, head of asset management consulting at KPMG UK, said: “The market for index products has exploded in recent years, and the findings help to uncover the drivers influencing this growing segment of the market and make an educated projection about what the future might hold for index products in the UK.”
The survey included quantitative and qualitative interviews with more than 130 UK financial advisers, wealth managers and private bankers, who collectively oversee more than £4.5trn ($5.9trn, €5.09trn) of client assets.