The tax efficiency offered by exchange-traded funds (ETFs) has made them the structure of choice for advisors. Given the increased wealth of retail investors, Cerulli expects advisors to continue focusing more on tax minimization solutions—and transferring separately managed account (SMA) assets to the ETF structure may be one component, according to The Cerulli Edge—U.S. Asset and Wealth Management Edition.

In 2017, 29% of high-net-worth (HNW)-focused practices (those catering to households with $5 million or more in investable assets) offered tax planning guidance. That share had grown to 45% as of 2023. In a 2024 Cerulli survey, HNW practice management executives rank tax minimization first, alongside wealth preservation, as what they perceive as their clients’ most important objectives (73% rate them very important).

Beyond tax efficiency, operational efficiency—including cost—is a critical component of SMA-to-ETF conversions. “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,” says Daniil Shapiro, director. “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,” he adds.

The addressable market for SMAs and other advisor-managed securities to convert to ETFs remains difficult to define at this early stage. Cerulli’s research estimates 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. Yet, according to the research, 45% of advisors report using separate accounts, compared to 90% using the ETF structure. The average SMA allocation for an advisor is 7.7%, although it rapidly shrinks for low core-market practices. Advisors with $500 million and up in practice assets report a hefty 12% allocation, which they plan to increase to 15% 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,” notes Shapiro.

Cerulli asserts the key challenges to 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 concludes.