Following analysis of over 600 portfolios, BlackRock estimates assets in ETFs and tracker funds will grow by $500bn to $1.7trn over the next two years, making up 30% of UK wealth portfolios.
The firm warns the UK asset management industry is in a state of flux which is encouraging investors to address old habits and question current advice.
In particular, the firm has highlighted four key trends at play which are driving the current direction of travel.
The first is an evolution of business models. Since the Retail Distribution Review (RDR) was implemented in 2012, the UK wealth management and IFA sectors have gone through “a once in a generation revolution”.
This regulation has caused more IFAs to outsource client assets to discretionary fund managers (DFMs) and centralised investment propositions. According to NextWealth, 50% of IFA assets are now outsourced to DFMs.
Gareth Johnson, head of digital channels and investment solutions at Brewin Dolphin, comments: “More advisers than ever are outsourcing their discretionary portfolios and, with a greater focus on costs, it is increasingly important to scrutinise drivers of portfolio returns.
“This is about having access to the broadest range of strategies so that we can meet the needs of our clients, or clients of advisers, more efficiently.”
Furthermore, the introduction of MiFID II at the start of 2018 has shone a light on what investors are paying for, which favours lower-cost products such as ETFs and index funds.
Another driver to ETFs and index funds, the asset manager says, is the recognition from the wealth management industry that active portfolios work harder with indexing.
Instead of viewing investing through the active versus passive lens, BlackRock says there is a greater shift towards indexing combined with true alpha seeking active funds.
This has led to more holistic portfolio construction, with wealth managers using tech-based analysis to view return drivers, the firm adds.
As Joe Parkin (pictured), head of iShares UK at BlackRock, says: “Investment managers have a far better understanding of where returns are coming from. ETFs are a great tool in the toolbox for almost every scenario whether that is core building blocks or making specific bets on duration risk.”
BlackRock says another trend occurring in the UK is the increasing usage of robo-advice and digital wealth management.
This is making investment more accessible to more people than ever and in most cases, ETFs are the building blocks used by these providers.
Finally, the firm argues the issue around trading ETFs efficiently on UK platforms is slowly diminishing.
Many legacy platforms have still not made the technological changes required for efficient ETF trading however, Parkin says UK platforms are beginning to look forward to the future of investing.
Many wealth managers still view this as the single biggest issue which is stopping them from increasing their ETF usage.
Bill Vasilieff, chairman at Novia Financial, comments: “We are seeing a growing demand on our platform for indexing from both advisers and DFMs including ETFs and mutual funds.
“Investors are increasingly focused on understanding the characteristics of what they hold within their portfolios, and how the different components interact to deliver a specific outcome.”
Parkin concludes: “We have reached a pivotal moment in the UK investment story. There is growing recognition that many of the habits and processes that have got us to where we are today have become outdated and won’t meet the needs of clients in the future.”