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RIAs may one day look back on 2017 as a year for the financial services history books.

In the markets, U.S. equity indices seemed to hit new highs every week. In the RIA business, the torrid pace of mergers and acquisitions (M&A) carried over from 2016 through the first half of the year before slowing in the third quarter.1 It remains to be seen if 2017 will end up as the third consecutive record-setting year for M&A activity.

Whether we see a new record or not, my conversations with RIAs across the country left no doubt that M&A was top-of-mind for many in 2017. We addressed that important topic in two blogs about how the M&A wave is reshaping the RIA landscape and how RIAs might prepare themselves for a potential M&A.

In November 2017, the Schwab IMPACT Conference was, as always, a great event. It provided an excellent forum for an exchange of ideas on the issues affecting RIAs and their practices, as well as a look at what may lie ahead in 2018.

One topic that is likely to be of growing importance for RIAs and their clients in 2018 and beyond is exchange traded funds (ETFs). The results of a recent survey by the audit and consulting firm EY seem to underscore just how important:

  • EY projects that global ETF assets will be $7.6 trillion by the end of 2020, up from an estimated $4.4 trillion at the end of 2017.
  • Respondents to the EY survey predict ETF asset growth of about 15% per year for the next three to five years.2

At OppenheimerFunds, we concur that the explosive growth in ETFs will continue on a record pace. Our smart beta approach to ETF investing was the subject of an educational session at IMPACT.

Led by my colleagues, Sharon French, Head of Beta Solutions at OppenheimerFunds; David Mazza, our Head of ETF Investment Strategy; and Mo Haghbin, OppenheimerFunds’ Head of Product, Beta Solutions, the session provided insights on:

  • Some of the challenges RIAs face in the smart beta ETF space,
  • Our approach to creating smart beta and factor-based ETFs, and
  • How and why RIAs can use smart beta in their practices and client portfolios.

Smart Beta: Passing Fad or Investment Opportunity?

The session also addressed one of the questions some RIAs wonder about: Is smart beta a legitimate investing strategy or simply a passing fad or marketing term? The results of a survey of RIAs we conducted at IMPACT seem to indicate that smart beta strategies are here to stay:3

  • 75% of survey respondents say they already use some type of smart beta strategies for their clients.
  • Among RIAs already using smart beta, the clear preference is for multi-factor strategies (41%), with single-factor and alternatively weighted strategies (17% each) following.
  • Two-thirds (67%) of RIAs we surveyed say they plan to maintain or increase those allocations.

The survey also shows that RIAs still have some work to do in bringing clients up to speed on smart beta. Almost half (48%) say client education is the biggest hurdle to implementing smart beta strategies in client portfolios.

During the panel discussion, our Beta Solutions team discussed the powerful market forces driving smart beta’s growth. For example, investors’ aspirations to beat the benchmarks combined with their lack of confidence in active managers to do so, has contributed to a significant increase in assets flowing into passive investment strategies. That, combined with increased regulatory scrutiny from recent changes in the U.S. Dept. of Labor’s Fiduciary Rule, is putting downward pressure on fees and driving a shift to a fee-based business model for RIAs.

The challenge for RIAs now is to maintain a balancing act that meets client demands for the lowest possible cost, increased diversification, and reduced risk, while delivering above-market returns. Smart beta ETF strategies may help RIAs achieve that delicate balance by providing them the potential to deliver better risk-adjusted returns in a more cost-effective way.

We at OppenheimerFunds certainly believe smart beta strategies will continue to grow in popularity based on their potential to help RIAs address performance, fees, and regulatory challenges, while providing diversification and risk-management benefits to clients.

If you were unable to attend the OppenheimerFunds education session on Smart Beta, I invite you to watch it here. You’ll learn about:

  • The transparent, rules-based investment approach that underlies smart beta strategies,
  • The different types of factors OppenheimerFunds applies to our smart beta ETFs,
  • How those factors perform over different market cycles, and
  • Why you might want to consider a multi-factor strategy, if you haven’t already done so.

I’m sure you’ll find it interesting, timely, and valuable for your clients and practice as you look ahead to the coming year and beyond.

Additional information about OppenheimerFunds’ smart beta products and services may be found here.

Follow @OppFunds for more news and commentary.

 
  1. ^Source: “Q3 2017 M&A Drops Sharply, Record Year Now in Doubt,” DeVoe & Company RIA Deal Book™, Third Quarter 2017.
  2. ^Source: “Reshaping Around the Investor,” EY Global ETF Research 2017, November 2017.
  3. ^OppenheimerFunds polled 29 RIAs/advisors at the Schwab IMPACT conference via the Schwab mobile app.