ETFs want to help investors save for retirement, too. 

More than 30 asset managers have filed applications with the Securities and Exchange Commission to add multi-share classes to current ETF products that would essentially allow them to act like traditional mutual funds. It’s a Vanguard-inspired strategy that would open the door to retirement plan menus and provide a foothold in America’s lucrative 401(k) industry that invests about $7.4 trillion for millions of savers. 

“The retirement market represents one of the last remaining frontiers,” said Amrita Nandakumar, president of Vident Asset Management. 

Cover Your Assets

ETFs have been stealing market share from mutual funds for the better part of a decade, but their low costs and tax-efficiency advantages aren’t a huge hit in retirement accounts. Capital gains taxes don’t apply to 401(k)s and the liquidity of ETFs in intra-day trading isn’t a benefit in long-term retirement accounts either. Many legacy systems were also built to handle mutual funds, and they are now being used to manage about half of all retirement assets, according to the Investment Company Institute. The report also found:

• Retirement funds represent close to one-third of US households’ total financial assets as of last year.
• All retirement accounts held $38.4 trillion in 2023, up 12% from the previous year, according to the study. 

Sharing Is Caring. State Street became the latest major institution to get in on the act, filing for permission to create mutual fund share classes that are specifically designed for retirement plans. Schwab applied for the structure in June, following other heavyweights, like Morgan Stanley, Dimensional Fund Advisors, and Fidelity. “If ETF issuers have learned anything over the past 30 years, it is that first mover advantage can mean everything,” Nandakumar said.

Aside from the massive opportunity, 401(k)s can also offer access to new clients. Nandakumar says offering ETFs in 401(k) plans might help State Street reach customers who haven’t heard of the firm before.

Good for Business. If the SEC green lights the applications, those ETFs will essentially mimic a mutual fund and become available in retirement accounts. The wrapper will begin to capture more of the 401(k) plan market, said Sam Adams, CEO of Vert Asset Management. “In tax-deferred accounts, including 401(k) plans, the choice between a mutual fund or ETF is really just packaging,” he said. While there are certainly roadblocks, custodians and fund managers are working together to iron out the process. “It’s really just a matter of time.”

Don’t worry, clients aren’t going anywhere … for now.

Aside from attracting new assets, an advisor’s biggest worry is holding on to current ones. Thankfully, clients looking for greener pastures elsewhere aren’t the norm. More than half of high-net-worth clientele have only ever worked with one advisor, according to a recent survey from Dynasty. Meanwhile, a quarter have voluntarily changed advisors once, and just 17% have switched twice. 

The bad news is the Great Wealth Transfer is likely going to challenge the status quo. Younger clients are simply more prone to change, said Tim Oden, Dynasty’s chief growth officer. “As their wealth grows, their advisors’ investment strategies and expertise might not grow with them,” he told The Daily Upside.

How Do You Do, Fellow Kids? 

The Great Wealth Transfer is already underway, but 41% of respondents’ adult children do not work with their financial advisor and 34% likely will not in the future, the survey found. In order to attract and retain those younger clients, Oden recommended that veteran advisors take steps to address succession plans early. To bridge the generational gap, Oden and the research suggested:

• Leveraging text messages and video conferences to avoid looking outdated to Gen Z. 
• Keeping the dialogue going with quarterly and annual meetings to understand a client’s needs. For example, the survey found that 45% of clients cited tax planning as a service offered by their financial advisor, but only 28% of them value that feature.

“If you’re not talking to your clients, someone else will,” Oden said.

Married With Children. Though Gen Z often gets a bad rap for being more interested in TikTok accounts than retirement plans, they can be savvier than prior generations. The survey found that 48% of all respondents said they recognized potential conflicts of interests from advisors recommending proprietary products that may have been chosen for reasons other than being in clients’ best interest. Younger clients are more likely to distinguish those conflicts, the survey said.

The magic of Google is also helping them more easily understand financial markets, Oden said. “They question many things their parents took for granted.”

Tell the marketing team not to skimp on the fine print.

The SEC is cracking down on misleading marketing especially around advertisements that feature high-profile endorsements. Wahed Invest agreed to pay $250,000 to settle agency claims that the Shariah-compliant robo-advisor ran ads featuring professional athletes without disclosing that they were paid endorsers — not clients. 

Although the SEC’s updated marketing rules to allow testimonials, endorsements, and third-party ratings went into full effect in 2022, advisors still need to disclose the information surrounding those promotions. “Wahed willfully violated the antifraud provisions,” the agency said in a release.

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