Morningstar Advisor - October/November 2009 - 19

Investment Briefs RIAs Prefer ETFs, Mutual Funds, Survey Says As broker/dealers move to increase fee-based advice relationships, the business models of B/D-affiliated advisors might seem to be converging with those of independent registered investment advisors. But as a recent Morningstar Advisor/Cerulli Associates survey of advisors shows, significant differences in the channels remain, most notably in product allocation and client net worth. The survey reveals that RIAs have a higher percentage of their assets under management (56%) invested in traditional 1940 Act mutual funds than those advisors affiliated with a broker/dealer (49%). The difference is attributable to RIAs’ higher allocation to equity mutual funds, which account for 38% of RIA assets compared with 30% of a typical B/D respondent’s assets. To complement their fund usage, RIAs have also adopted ETFs, which account for 9% of RIA assets but only 2% of B/D advisor assets. The survey also found that B/D advisors are more likely to allocate assets to insured products: 19% of B/D advisors’ AUM are attributed to annuities and life insurance products versus only 4% among RIAs. The survey also shows that RIAs have been able to target and acquire clients in higher net-worth tiers more successfully than their B/D counterparts. Only 49% of RIAs focus their practices on clients with less than $1 million in net worth, but these core markets account for 71% of B/D advisors. Although this finding would seem to indicate that advisors wanting high-net-worth clients should go the independent route, it is more about correlation than causation. Those advisors who have transitioned to the RIA channel have been more likely to be working with high-net-worth clients before their move than the average advisor. In these cases, advisors’ migration to the RIA channel was more a validation of their success than a catalyst for it. The size of populations also come into play: There are about nine times as many B/D advisors (276,000) as RIAs (33,000), so the population of high-net-worth investors being served through traditional B/D channels outnumbers those served by RIAs. In the same survey, we wanted to find out what is attracting advisors to ETFs, and we weren’t surprised that it’s cheap expenses. Just more than half of survey respondents cited low fees as an important factor in influencing ETF usage. Cerulli has generally seen greater adoption of passive products and greater cost sensitivity among independent RIAs than in traditional B/D channels, and this was evident in the survey: 63% of RIAs named low fees as a major factor in their adoption of ETFs compared with 44% of B/D advisors. Advisors also see ETFs as an efficient way to gain exposure to specific investment themes. Nearly two thirds of survey respondents use ETFs to gain equity exposure, and nearly half of survey respondents reported that they largely use ETFs tactically and actively trade them. ETF usage was fairly widespread among respondents, but penetration is not as deep across the broader advisor universe, with only about half of all advisors having used ETFs. Half of all survey respondents plan to increase ETF usage in the coming years—with almost no advisors planning to decrease their usage. This report was prepared by Bing Waldert, a director with Cerulli Associates, and Scott Smith, a senior analyst with Cerulli Associates. How ETFs Are Employed in Client Portfolios 60% 50 40 30 20 10 Actively trade/tactical Blended approach/ strategic and tactical 52 43.6 49 27 50.9 35.5 20 5.5 Buy and hold/strategic 14.8 1 Other 0 .6 B/D Advisors RIA All Advisors Product Allocation: Percentage of AUM Product 60% 43.6 50 Mutual funds 40 Equity mutual funds 30 Fixed-income mutual funds 20 Other mutual funds 10 Individual securities Actively Trade/tactical Individual equities B/D 50.9 Advisors RIA Product B/D Advisors RIA B/D Advisors All Advisors RIA 49% 27 30% 14% 5% 56% 35.5 38% 17% 1% Variable annuities Money markets, cash, etc. 20 Exchange-traded funds 14.8 Separate accounts 5.5 12% 5% 2% 5% .6 4% 3% 2% 2% 2% 8% 9% 3% 1% 1% 2% 3% 16% 15% Blended approach/ 9% 6% strategic and tactical 7% 9% 1 0 Fixed annuities Buy and hold/strategic Other Variable life/VUL/Whole life/Term/LTC REITs Other Individual fixed-income securities Costs of Target-Date Funds Vary Widely An analysis of target-date fund expenses reveals a dramatic range of fees among the 34 Source: Cerulli Associates, Morningstar. MorningstarAdvisor.com 19
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Morningstar Advisor - October/November 2009

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2009

Morningstar Advisor - October/November 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
How Do You Use Behavioral Finance in Your Practice?
Investing in the Moment
Investment Briefs
How the Best Large-Cap Managers Rise Above the Rest
Don’t Give Up on Stocks Just Yet
Makeup of the Mind
A Top-Down Approach
In Practice: Patterns of Investor Irrationality
A Call for Nudges
The Furious Comeback of Emerging Markets
Junk-Bond Pioneer
Four Picks for the Present
Consumer Staples Hold Up in the Kitchen
Familiarity Can Breed Bad Investment Decisions
Leave the ‘Junk Rally’ Behind and Look for Quality at a Reasonable Price
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
New at Morningstar
Meet the New Boss, Same (School) as the Old Boss
Morningstar Advisor - October/November 2009 - Morningstar Advisor - October/November 2009
Morningstar Advisor - October/November 2009 - Cover2
Morningstar Advisor - October/November 2009 - 1
Morningstar Advisor - October/November 2009 - 2
Morningstar Advisor - October/November 2009 - Contents
Morningstar Advisor - October/November 2009 - 4
Morningstar Advisor - October/November 2009 - 5
Morningstar Advisor - October/November 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2009 - 7
Morningstar Advisor - October/November 2009 - 8
Morningstar Advisor - October/November 2009 - Letter from the Editor
Morningstar Advisor - October/November 2009 - Contributors
Morningstar Advisor - October/November 2009 - 11
Morningstar Advisor - October/November 2009 - How Do You Use Behavioral Finance in Your Practice?
Morningstar Advisor - October/November 2009 - 13
Morningstar Advisor - October/November 2009 - 14
Morningstar Advisor - October/November 2009 - Investing in the Moment
Morningstar Advisor - October/November 2009 - 16
Morningstar Advisor - October/November 2009 - 17
Morningstar Advisor - October/November 2009 - 18
Morningstar Advisor - October/November 2009 - Investment Briefs
Morningstar Advisor - October/November 2009 - 20
Morningstar Advisor - October/November 2009 - 21
Morningstar Advisor - October/November 2009 - How the Best Large-Cap Managers Rise Above the Rest
Morningstar Advisor - October/November 2009 - 23
Morningstar Advisor - October/November 2009 - 24
Morningstar Advisor - October/November 2009 - 25
Morningstar Advisor - October/November 2009 - 26
Morningstar Advisor - October/November 2009 - Don’t Give Up on Stocks Just Yet
Morningstar Advisor - October/November 2009 - 28
Morningstar Advisor - October/November 2009 - 29
Morningstar Advisor - October/November 2009 - Makeup of the Mind
Morningstar Advisor - October/November 2009 - 31
Morningstar Advisor - October/November 2009 - A Top-Down Approach
Morningstar Advisor - October/November 2009 - 33
Morningstar Advisor - October/November 2009 - 34
Morningstar Advisor - October/November 2009 - 35
Morningstar Advisor - October/November 2009 - 36
Morningstar Advisor - October/November 2009 - 37
Morningstar Advisor - October/November 2009 - 38
Morningstar Advisor - October/November 2009 - 39
Morningstar Advisor - October/November 2009 - In Practice: Patterns of Investor Irrationality
Morningstar Advisor - October/November 2009 - 41
Morningstar Advisor - October/November 2009 - 42
Morningstar Advisor - October/November 2009 - A Call for Nudges
Morningstar Advisor - October/November 2009 - 44
Morningstar Advisor - October/November 2009 - 45
Morningstar Advisor - October/November 2009 - 46
Morningstar Advisor - October/November 2009 - 47
Morningstar Advisor - October/November 2009 - The Furious Comeback of Emerging Markets
Morningstar Advisor - October/November 2009 - 49
Morningstar Advisor - October/November 2009 - 50
Morningstar Advisor - October/November 2009 - 51
Morningstar Advisor - October/November 2009 - 52
Morningstar Advisor - October/November 2009 - 53
Morningstar Advisor - October/November 2009 - 54
Morningstar Advisor - October/November 2009 - Junk-Bond Pioneer
Morningstar Advisor - October/November 2009 - 56
Morningstar Advisor - October/November 2009 - 57
Morningstar Advisor - October/November 2009 - Four Picks for the Present
Morningstar Advisor - October/November 2009 - 59
Morningstar Advisor - October/November 2009 - 60
Morningstar Advisor - October/November 2009 - Consumer Staples Hold Up in the Kitchen
Morningstar Advisor - October/November 2009 - 62
Morningstar Advisor - October/November 2009 - 63
Morningstar Advisor - October/November 2009 - Familiarity Can Breed Bad Investment Decisions
Morningstar Advisor - October/November 2009 - 65
Morningstar Advisor - October/November 2009 - Leave the ‘Junk Rally’ Behind and Look for Quality at a Reasonable Price
Morningstar Advisor - October/November 2009 - 67
Morningstar Advisor - October/November 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2009 - 69
Morningstar Advisor - October/November 2009 - 70
Morningstar Advisor - October/November 2009 - 71
Morningstar Advisor - October/November 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - October/November 2009 - 73
Morningstar Advisor - October/November 2009 - Undervalued Stocks
Morningstar Advisor - October/November 2009 - 75
Morningstar Advisor - October/November 2009 - 76
Morningstar Advisor - October/November 2009 - 77
Morningstar Advisor - October/November 2009 - 78
Morningstar Advisor - October/November 2009 - New at Morningstar
Morningstar Advisor - October/November 2009 - Meet the New Boss, Same (School) as the Old Boss
Morningstar Advisor - October/November 2009 - Cover3
Morningstar Advisor - October/November 2009 - Cover4
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