Factor-based and alternatively-weighted indexes, generically called “smart beta indexes,” have transformed the current investment landscape. This impact now extends to the retail financial advisor audience according to a new FTSE Russell study, Smart Beta: 2015 Survey Findings from U.S. Financial Advisors. The findings indicate that advisors are increasingly incorporating smart beta into their client portfolios, but to appreciate how smart beta is penetrating the retail market, we need to look more closely at the profile of these advisors using smart beta.
Advisors employing smart beta are heavier users of ETFs and alternative investments.
Advisors who use more ETFs and alternative investments (hedge funds, limited partnerships) in their practices are more likely to use smart beta. Among smart beta users, 32% of advisors have more than 20% of client portfolio assets invested in ETFs, compared to 16% for non-users of smart beta (See Fig. 1-2). Similarly, 20% of advisors who use smart beta have more than 10% of client portfolio assets in alternative investments, compared to 11% for non-users of smart beta.
Smart beta users are more often advisors whose practices extend beyond the core activities of investment selection, asset allocation and financial planning.
Compared to advisors who have not used smart beta products, smart beta users are more likely to report spending a great deal of time doing risk modeling (27% vs. 14%) and estate planning (18% vs. 9%). Conceivably, because their practices provide a greater range of client services and because they don’t have enough time to manage individual stocks and bonds, smart beta users are more likely than non-users to use actively managed funds (79% vs. 68%).
RIAs are more likely than regional, independent and wirehouse advisors to know the term “smart beta.”
Compared to other advisor channels, RIAs (Registered Investment Advisors) are most likely to know the term “smart beta” (see fig. 3). RIAs are also the most likely to identify as being smart beta users. Forty-six percent of RIA advisors in the survey reported that they have used smart beta compared with an average of 32% of other advisors (see fig. 4). And it’s no surprise that advisors who are more familiar with smart beta are more likely to be users.
Even though more than two-thirds of the advisors surveyed are currently using a variety of smart beta products in their practices, less than one in five advisors report that they are very familiar with the term “smart beta.” This suggests that smart beta education is still needed and providers of indexes and smart beta products, including exchange traded funds (ETFs), should consider ramping up their educational programs focused on the advisor community.
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