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Growing demand for index-based strategies has been driven by financial advisors seeking low-cost, solutions as they reallocate their time from investment management to financial planning. While index adoption is gaining momentum across advisor types, a distinct segment is setting the pace for deeper engagement, in-depth evaluation and sophisticated implementation of passive solutions: the index-based product “power user.”

A recent whitepaper¹ published by Cerulli Associates examines how this group, defined as financial advisors who allocate at least 75% of client assets to index-based products, is creating a blueprint for other advisors looking to boost their usage of index-based strategies and get more value from their relationships with index providers.

What Sets Power Users Apart

Cerulli’s research found that power users stand out in several ways. Most are younger than 45 years old, work in independent or hybrid RIA channels and often build their own model portfolios.² Nearly one-third have an average client size of USD 2 million or more in investable assets, and this group leans heavily on index-based strategies across asset classes, including U.S. large-cap equity, international equity and U.S. taxable fixed income.²

Exchange-traded funds (ETFs) are power users’ preferred vehicle for passive strategies, which isn’t surprising given ETFs’ typical low cost, ease of use and tax efficiency characteristics. In fact, 92% of power users report a high use of the ETF vehicle to access index-based products, compared to 77% of all advisors surveyed by Cerulli.²

Diving deeper into how power users evaluate ETFs, Cerulli found that they are more likely than other advisors to prioritize index methodology and expense ratio when selecting index-based equity ETFs, as shown in Exhibit 1—a testament to their desire for low-cost, product exposures.³

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What Power Users Want in Indices

Power users are more likely than other advisors to scrutinize the design and methodology of the index that underlies any passive ETF—not just those ETFs that are designed to track equities.

As shown in Exhibit 2, 89% of power users rank quality of index design and methodology in their top three considerations when reviewing an index for use with an ETF, compared to 82% of all advisors.²

Power users often want to understand the nuances of an index, including its constituents, rules and rebalancing frequency to clearly articulate why—and how—index-based strategies work. As one RIA noted, “I think it’s important. If I’m going to be investing people largely in index funds, I should be explaining why I’m doing that.”²

These advisors are more inclined to use supporting educational content available on an index (69% versus 60% for all advisors) and consider the underlying index provider’s brand (64% versus 56%) to support their client conversations.²

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Using Index Provider Resources in Their Practices

When considering passive products, power users look to index providers to help them better understand and evaluate the underlying indices. Index providers offer a wide range of resources—from thought leadership to data and tools—designed tohelp power users and other advisors’ use of index-based offerings.

Discover more insights on index-based strategy usage and ways index providers can support advisors in the Cerulli Associates whitepaper “Redefining the Role of Index Providers.”

¹ The Cerulli Associates whitepaper “Redefining the Role of Index Providers” was sponsored by S&P Dow Jones Indices.

² Please see page 19 of Cerulli Associates’ “Redefining the Role of Index Providers.”

³ Please see pages 17 and 19 of Cerulli Associates’ “Redefining the Role of Index Providers.”

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