Core Strength: Advisor Affinity for Core Holdings Continues to Build

Advisors believe the majority of client portfolios should be allocated to core investments1, according to “At the Core: Advisor Views on Investment Trends,” a new study of independent advisors by Charles Schwab Investment Management, Inc. (CSIM). On average, advisors say 62 percent of clients’ holdings should be allocated to core investments. More than one-third of advisors (38 percent) believe core has an even bigger place in client portfolios, saying that core should make up 70 – 100 percent of holdings.

“An investor’s core holdings are the foundation of their investment portfolio, and independent advisors are focused on finding low-cost, straightforward products for their clients to serve as those crucial building blocks,” said Marie Chandoha, chief executive officer of CSIM. “Our industry has a reputation for selling products that can be too expensive and complex, but advisors are continuing to advocate for simplicity, transparency and choice in client portfolios.”

When it comes to the investment vehicle of choice at the core of a portfolio, advisors say exchange traded funds (ETFs) make up the largest portion of their clients’ core holdings. Looking ahead, 69 percent of advisors say they’ll increase their clients’ core allocation to ETFs in the next five years.

Core considerations

Advisors say that economic and market events impact how much of a portfolio should be allocated to core holdings. Roughly half of advisors say that tax reform (54 percent), a rise in the federal funds interest rate (51 percent) and market volatility (48 percent) would drive a greater allocation to core.

In addition, the vast majority of advisors (86 percent) say a clients’ level of wealth impacts how much of their portfolio should be allocated to core holdings. That said, advisors are split on what that threshold is, with 46 percent saying “mass affluent” clients (those with $100,000-$249,999 in investable assets) should allocate more of their portfolio to core holdings than “high net worth” clients (those with more than $1 million in investable assets) and 40 percent saying the opposite.

Core choices

Not surprisingly, the majority of advisors (66 percent) say that total cost is the most important consideration when choosing any index fund, whether it is a mutual fund or ETF. Looking beyond cost, advisors say that when deciding between two funds that have the same investment objective and price, they look to performance history (58 percent), track record (49 percent) and an asset manager that provides great portfolio construction education and guidance (37 percent). Notably, few advisors chose a fund’s brand name (16 percent) as an important factor in deciding between two funds.

When it comes to mutual fund investing, more than half of advisors (58 percent) say that low or no minimums are very important when considering a fund. Forty-four percent of advisors say mutual funds should have a single share class, accessible to all. Half of advisors believe everyone should have the same access to the same lowest-cost funds, regardless of how much they have to invest.

“Independent advisors are focused on choosing the best products to achieve their clients’ goals without unnecessary costs or onerous minimum investment requirements. Advisors are a bellwether for the investing industry at large, which is heading toward greater access and affordability,” said Jonathan de St. Paer, president and head of strategy and product for CSIM.

Beyond the core: ETFs on the rise

Looking at the total portfolios, spanning core and non-core holdings, more than half of advisors (52 percent) say ETFs are already the primary investment vehicle in client portfolios and even more (64 percent) say that ETFs will be the go-to investment type in client portfolios in the future. That said, mutual funds continue to be important to advisors, with 41 percent saying mutual funds are the primary investment vehicle they use today.

Use of all-ETF and all-mutual fund portfolios is already common and poised to rise in coming years. Half of advisors (50 percent) have already put some client investment portfolios (excluding cash) entirely in ETFs and about the same (48 percent) have put some of their client portfolios entirely in mutual funds. This trend is even more pronounced among Millennial advisors (60 percent) and female advisors (57 percent). Looking ahead, more than a quarter (28 percent) of advisors surveyed say they will consider all-ETF portfolios within the next five years.

To review the full study, click on the following link.

About the Study

At the Core: Advisor Views on Investment Trends by Charles Schwab Investment Management is an online study among a national sample of 381 independent advisors with at least $50 million in assets under management who have traded an ETF in the past month for an account they manage. Conducted by Logica Research (formerly Koski Research) from August 14 – August 31, 2018, the study has approximately a three percent margin of error. Survey respondents were not asked to indicate whether they custodied assets with Charles Schwab & Co., Inc. All data is self-reported by study participants and is not verified or validated.

About Charles Schwab Investment Management

Founded in 1989, Charles Schwab Investment Management, Inc., a subsidiary of The Charles Schwab Corporation, is one of the nation’s largest asset management companies, with more than $360B in assets under management as of 9/30/18. It is among the country’s largest money market fund managers based on assets under management according to iMoneyNet as of 9/30/18. It is also the third-largest provider of index mutual funds and the fifth largest provider of ETFs.*

More information is available at schwabfunds.com.

*Source: Strategic Insight, as of 9/30/18; based on assets under management

Disclosures

Through its operating subsidiaries, The Charles Schwab Corporation (NYSE:SCHW) provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (Schwab), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; compliance and trade monitoring solutions; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and lending services and products. More information is available at www.schwab.com and www.aboutschwab.com.

CSIM is an affiliate of Schwab and a subsidiary of The Charles Schwab Corporation.

Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

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1 Core investments are defined as broad large-, mid-, and small- cap equities, broad international equities and corporate and Treasury bonds, regardless of investment vehicle.

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