Even the best dogs* may be tempted to chase a squirrel in the park.

So may be the case with investors and returns. That’s part of the reason why returns for the average dollar invested in US mutual and exchange-traded funds reliably lag the returns of the products themselves. Over the past 10 years, the average dollar saw returns of 8.7% annually, compared with 9.9% across the universe of funds, which is an overall gap of 1.2 percentage points or 12% less, per Morningstar’s latest Mind the Gap report, published today. However, that difference may be shrinking, with the rolling 10-year average annual gap being about 1.7 percentage points in 2021 and 2022.

“Overall, I’m encouraged by what I’ve seen in the survey,” Morningstar managing director and report author Jeffrey Ptak said. “We’ve seen some improvements in the way fund investors access funds and the way they put them to work. By many measures, they’ve become more disciplined and less prone to the sort of self-injurious trading we’ve seen in the past.”

Delta Farce

Some categories stand out much more than others in terms of how the average dollar performed in comparison with average fund returns. The gap was lowest for US equity funds (0.4 percentage points) and highest for alternatives (1.6 percentage points), for example. There were also differences by management style, with the gap for active funds being higher than passive ones, at 1.6 percentage points versus 1.1 percentage points, respectively.

While performance-chasing is responsible for much of the gaps, the timing of fund purchases from regular rebalancing or investing from every paycheck is also a contributor. Thus, the results aren’t “definitive proof of individual investors’ fallibility,” the report notes. Even so, the findings show the potential benefits in using simple, diversified funds, with allocation funds being particularly beneficial, Ptak said, adding that they automate mundane but important tasks like rebalancing and adjusting. “Simpler beats complex.”

For the first time, Morningstar also considered several other fund categories:

• Investors in buffer ETFs saw average returns higher than those of the funds themselves over three and five years, thanks to good timing of flows.
• Overall, there was only a small negative performance gap in the leveraged single-stock ETF category, but there were massive differences in how investors fared across individual funds.
• Crypto ETFs were a sore spot, with the average dollar losing 5.8% annually since January 2024, substantially less than the 8.5% average annual gain for funds in the category.

Don’t Pull That Lever. Leveraged ETFs can be effective as extremely short-term trading tools, but they often don’t work well over time, said Chuck Failla, principal of Sovereign Financial Group. “The issue is that it’s falling into the hands of unsophisticated investors,” he said. “People should have access to more or less whatever they want, but they need to understand what they’re accessing. The issue with an ETF is that it’s so easy to access. It’s hard to put on any type of guardrail.”

*All dogs are good dogs, but we’re trying to make a point here, OK?

Fidelity is riding the retail investing wave.

In a sign of just how active investors have become, privately owned Fidelity Investments announced an average of 5.7 million daily trades on its platform during the second quarter, a 31% increase from a year earlier. The surge helped push Fidelity’s assets under management to nearly $8 trillion, up 23% year over year. But, it didn’t stop there. This year, Fidelity also introduced ETF share classes for existing municipal bond, short-term bond and real estate mutual funds, and bulked up its lower-cost actively managed ETFs, with expense ratios as low as 18 basis points. “We evolved our ETF offerings, enhanced our trading tools and continued to grow our unified managed household offering,” Fidelity CEO Abigail Johnson said in a statement.

If You Build It, They Will Come

Rising markets have certainly played a major role in earnings beats for the big brokerages. But Fidelity has also spent the past several months making alternatives a larger part of its business. In March, it fully launched model portfolios with built-in private market exposure while expanding its alternatives education program for advisors.

Fidelity isn’t alone in its expansion:

• This year, Charles Schwab completed its acquisition of Forge Global, expanding its private market capabilities, and rolled out spot bitcoin and ether ETF trading for retail clients. The discount brokerage reported record client assets of $13.1 trillion in the second quarter, up 22% from the same time last year.
• Robinhood, meanwhile, launched its advisors network and expanded the capabilities of Cortex, its AI-powered investment assistant. The online brokerage reported transaction-based revenue climbed 44% year over year, driven largely by options trading and event contracts.

“We have increasingly easy access to trading and have seen a new generation of retail traders join the market en masse, continuing the trend from the meme-stock craze earlier this decade,” said Jack Miller, head of global execution services with Baird. “This is before factoring in any ancillary effects from increased participation in sports betting and prediction markets. It’s a perfect storm for self-directed retail investing activity at a cultural level.”

In-and-out assets are a headache for advisors.

RIAs lose 2% to 5% of assets under management each year through standard retirement withdrawals and one-time client distributions, according to a recent Cerulli report. That may not sound alarming until it’s compared with the industry’s average annual organic growth of just 3% to 4% from 2019 through 2024. In many cases, routine client retirement spending can wipe out much of a firm’s hard-earned growth. “To climb out of that hole, you not only need to backfill, you need to go out and get more,” said Stephen Caruso, director of wealth management at Cerulli. “Markets have been very kind to RIAs, but if every year, you’re relying on the market to fill the gaps, you’re not growing organically in a meaningful way.”

Business development isn’t easy, especially for smaller firms that lack the resources to hire dedicated staff and are already stretched thin serving existing clients. Still, there are several areas where firms can improve.

Tell Your Friends About Me

Client referrals remain the most significant source of new assets for RIAs. However, actually tapping into that source can be a little tricky without a plan. “You don’t want to come off like an insurance agent from the ‘70s — not to malign my dad who was a State Farm agent — but asking for referrals can be hard to do without being awkward,” said Michael Garry, founder of Yardley Wealth Management.

• However, such referrals account for 74% of new client acquisition. Just over half of RIAs proactively ask clients for them.
• Cerulli recommends clearly communicating your core strengths, target demographics and specialized services so existing clients know exactly who to send your way.

Referrals alone, however, aren’t enough. Garry said more than half of his firm’s new clients come from online searches, a result of a regular schedule of podcasts, blogs, social media posts and emails. “It’s been that way for years now,” he told Advisor Upside. “Referrals are fantastic … but it’s hard to grow organically with just them.”

He said his firm started using a digital marketing platform for advisors about a year and a half ago, and since then, that portion of business has developed quickly. “The podcast content, which we record every other week, gets repurposed onto our socials and emails,” he said. “It’s made it a lot easier.”

Circle of Influence. Advisors are also building their networks beyond lawyers and accountants, now connecting with business coaches and personal trainers. “I am doing a lot of experimental and non-traditional networking such as volunteering in my community and being involved in groups that match my interests,” said Leslie Rea, a CFP with AG Wealth Management.