Page 47 - Investment Advisor June 2022

Why RIA Advisors Are Better Fund funds than advisors in the other two groups,
“and representatives from broker-dealers
Pickers Than BD Reps: Study are least likely to consider fund expense
ratio,” the report states. Also, one-third of
RIAs build client portfolios mainly with pas-
dvisors working with just broker- that favor promotion of active investing sive investments, “which is more than twice
A dealers and those affiliated with strategies among advisors who are regu- the percentage of broker-dealers (16.1%)
firms that are both registered invest- lated as fiduciaries. and dual-registrant advisors (15.8%).”
ment advisors and BDs — so-called dual The email survey of 811 responses The survey also showed the odds that
registrants — are more likely to be biased who were registered with Morningstar. advisors with RIAs consider the expense
toward active funds than those working com was done in September 2020. Of ratio when recommending a specific mutu-
purely with independent RIAs. that group, 459 were evaluated — a sam- al fund are 121% higher than for advisors
This is one reason the funds they select ple consisting of 37.5% RIAs, 33.8% BDs with BDs and dual registrants. Further,
underperform those picked by RIAs, who and 29% dual registrants. the odds that advisors with RIAs follow a
focus largely on expense ratios, according Blanchett said in an email to primarily passive investment strategy are
to a new study published by the Financial Investment Advisor that the focus of the 83% higher than for those with BDs.
Planning Association, “Does Advisor survey was on what attributes advisors The study concludes that “dual regis-
Channel Influence Passive Fund Choice?” consider when selecting funds. trants operate within a brokerage ecosys-
Why do these advisors choose funds dif- “All three channels considered expense tem that may influence how the advisors
ferently? While several factors are involved, ratio when selecting investments, but RIAs are trained to select fund investments
the research highlights the fact that advi- considered them at a significantly higher and develop an investment strategy.
sors working with BDs and dual registrants rate than BDs,” he explained. “The expense “If they are trained to favor a method
may be compensated by commissions and ratio doesn’t necessarily mean passive ver- of evaluation that promotes selection
asset management fees, depending on their sus active; it just means you’re focused on of actively managed mutual funds, then
relationships with clients. the fees associated with different products/ prior studies of fund performance predict
The recent study on the fund under- strategies when using them for clients. that the investment portfolios of their
performance in certain advisor chan- “Passive strategies are generally lower clients will underperform by roughly the
nels — conducted by Michael Finke, cost (so these two are related), and an addi- difference between the expense ratios on
professor at The American College of tional test did demonstrate that RIAs are active and passive funds,” it states. “This
Financial Services; Aron Szapiro, head much more likely to favor passive invest- performance deficit is magnified when
of Morningstar’s Center for Retirement ments, too, though. So, advisors with BDs asset fees are added to the negative alpha
and Policy Studies; and David Blanchett, are more focused on performance, while generated historically by active funds.”
head of retirement research for PGIM RIAs are more focused on expenses (and as Bottom line: Independent RIAs “are
DC Solutions — has these key findings: such are more likely to go passive),” he said. far more likely to value information on
• Historical differences in how advi- The RIA representatives in the sam- the most important characteristic pre-
sors with broker-dealers, RIAs and dual ple were slightly younger than other dicting future returns (expense ratio), to
registrants are compensated can affect advisors and had fewer clients. A major- select passive funds, and to implement a
how they select funds. ity of advisors with BDs and dual regis- passive investing strategy than broker-
• Advertising by active-family funds trants had more than 50 clients and 10 dealer representatives.”
promotes recent performance returns, years in the business. In addition, the researchers found
which may appeal to investors and “reward More advisors with RIAs, 24.2%, “no evidence” that fund characteristics
commission-compensated advisors” but had more than $200 million in average favored by dual-registrant reps differ
don’t predict future performance. assets under management vs. 17.3% for from BD reps when researching which
• RIA advisors “favor more salient” char- those with dual registrants and 14.2% of funds to recommend to clients.
acteristics such as expense ratios, where- advisors with BDs. Most respondents, As Blanchett told Investment Advisor,
as BDs and dual registrants favor recent roughly 80%, were male. “Dual registrants are kind of in between
returns and active investing strategies. [advisors affiliated with or working for] BDs
• RIA advisors are more likely to fol- PASSIVE TILT — OR NOT and RIAs; the analysis would suggest that
low passive investing strategies. Thirty-seven percent more RIAs evaluated their selection behaviors are more similar to
• The findings also show the conflicts expense ratios when searching for mutual [those tied to] BDs than RIAs though.”

JUNE 2022 INVESTMENT ADVISOR 45