Cerulli Research examines where many retail investors are holding their wealth and the structures now in use, and what the tax implications are. ETFs, it argues, have important tax efficiencies that are likely to be more salient in the current economic environment.

Advisors in the US will likely convert more separately managed account assets to the exchange-traded fund structure, tapping into qualities such as ETFs’ tax efficiencies, according to Cerulli Research. 

Considering the increased wealth of retail investors, Cerulli said it expects advisors to continue focusing more on tax minimization solutions. Shifting SMA assets to the ETF structure may be one component. 

The comments appear in The Cerulli Edge –The Americas Asset and Wealth Management Edition.

A SMA is a portfolio of securities that is professionally managed separately from other portfolios. With ETFs, they are considered to be tax-efficient because they tend to have low turnover, which can cut the realized gains that need to be distributed. Also, low turnover can mean a longer holding period for each of the underlying investments. ETFs generally hold underlying securities longer than 12 months, which usually qualifies any gains that are realized for favorable long-term capital gains tax rates. Another factor is that when ETF investors sell their shares on the stock exchange to other investors, the ETF portfolio manager does not need to buy or sell any of the ETFs' underlying investments. As such, one ETF investor’s sell decision has no impact on other investors, helping to keep capital gains distributions low. (Source: State Street Global Advisors.)

The research comes at a time when, with equity markets suffering massive falls – an estimated $6 trillion was wiped off US stocks' values between April 2 and 4 after President Donald Trump's tariff announcements – and concerns about a possible US recession, equity returns are expected to be lower. In that climate, the frictional costs that taxes can bring become more urgent. RIAs, brokers and others have used various strategies to handle the tax side, for example "tax-loss harvesting" â€“ offsetting taxable gains with losses in a portfolio to reduce the overall tax "hit" as much as possible. However, all such strategies come with costs, such as requiring the software and systems to execute such tax overlays on a portfolio. It is possible, therefore, that for some investors, an ETF may be a simpler way of achieving such an objective, depending on circumstances. (These points apply in the US, but even in other jurisdictions, such as the UK, which tend to be more heavily taxed, they apply arguably with even more force.)

Tax increasingly in focus
Continuing on the tax theme, Cerulli’s report said that 29 per cent of high net worth-focused practices (those catering to households with $5 million or more in investible assets) offered tax planning guidance. That share had grown to 45 per cent as of 2023. In a 2024 Cerulli survey, HNW practice management executives ranked/perceived tax minimization first, alongside wealth preservation, as their clients’ most important objectives (73 per cent rated them as very important).  

Beyond tax efficiency, operational efficiency – including cost – is a “critical component” encouraging a shift to ETFs from SMAs, the report said.

“The use of the ETF structure may allow for more streamlined purchase of securities and negates the necessity to distribute them among accounts – a challenge that grows alongside the number of accounts, strategy complexity, and declining minimums for who can access SMAs,” Daniil Shapiro, director, said. “Even if such ETFs are meant only for the firm’s clients, the ETF structure is solving an important operational challenge. It has been suggested that ETFs may help an advisor generate hundreds of thousands in cost savings.”  

Cerulli said it estimates that the total industry figure for SMAs is $2.7 trillion, of which more than half ($1.6 trillion) is in wirehouses, with another $484 billion within the registered investment advisor (RIA) channel. 

However, 45 per cent of advisors report using separate accounts, compared with 90 per cent using the ETF structure. The average SMA allocation for an advisor is 7.7 per cent, although it rapidly shrinks for low core-market practices.

Advisors with $500 million and more in practice assets report a 12 per cent allocation, which they plan to increase to 15 per cent through 2026. 

“It is possible that while the initial conversion discussions are focused on the benefits for RIAs, a broader pool to target may exist in the wirehouse channel,” Shapiro added. 

Cerulli asserts that the key challenges for achieving these conversions will be price and scale. “With ETF launch costs and annual operating costs each running in the hundreds of thousands of dollars, wealth management firms will have to put up meaningful assets for each conversion to an ETF for it to be attractive,” says Shapiro. “Cerulli believes there is a meaningful opportunity for white-label providers and ETF issuers to provide support for RIAs and other wealth management segment clients interested in launching their own ETF product or converting SMA assets into new ETF products,” he concluded.