Active managers offer institutional funds to reduce fees, says Broadridge
Institutionally priced funds gathered over USD600 billion of net new fund flows in 2017, according to data released today by Broadridge Financial Solutions.
At the end of 2017, 50 per cent of actively managed institutional fund assets were from retail channels – registered investment advisors (RIAs), broker/dealers and online – with the remaining 50 per cent from institutional channels – bank, private bank and trust. The amount of retail assets invested in institutional funds was less than 37 per cent at the end of 2012, but has steadily increased over the past five years.
The infusion of retail assets into institutional funds has been especially pronounced for registered investment advisors, with the RIA channel holding USD850 billion in institutional funds at the end of 2017. The RIA channel is also the largest channel for ETFs, with more than USD923 billion. The combination of institutionally priced actively managed funds, ETFs, and index funds has made the RIA channel the prime target for asset managers, with overall fund and ETF assets of USD2.8 trillion at the end of 2017.
"Active managers pushed back on index funds and ETFs in 2017 by cutting fees for actively managed funds, and introducing institutional shares for existing funds," says Frank Polefrone (pictured), senior vice president of Broadridge's data and analytics business. "The increase in fee based advisors across all retail channels, as well as the changing product demand by broker dealers, has created an environment where the only asset gains for actively managed funds in 2017 were from institutionally priced products."
Broadridge tracks over USD12 trillion of ETF and fund assets across third party retail and institutional channels, and more than 30 per cent of those assets are now allocated to institutionally priced funds.
Over the past year, net new assets for institutional funds sold through third party distribution channels increased by USD612 billion, an increase of 15 per cent.
During this period, load funds had negative net flows of USD380 billion. During 2017 net new assets into all long term mutual funds sold through third party channels increased by USD385 billion, an increase of 5 per cent. The use of institutionally priced funds is spread evenly between retail and institutional channels.
The largest channel for institutional funds is the private bank channel with USD880 billion, while the fastest growing channel for institutional funds over the past five years has been the RIA channel, with an increase of USD690 billion over this period.
Assets in institutional funds have grown 8.3 per cent annually over the last five years compared to 4.5 per cent in direct-sold (no-load) funds and just 0.8 per cent in retail load funds.
"While cutting fees gets a lot of attention, the dramatic flow of assets into institutionally-priced funds has had an even more pronounced impact for shareholders," says Jeff Tjornehoj, Broadridge's director of fiduciary and fund research. "For perspective, the weighted average expense ratio – roughly what most shareholders pay – of equity mutual funds is now in line with pricing for bond fund fees five years ago. That's a sea change."