The widespread move to commission-free trading in the US is expected to boost the adoption of ETFs by financial advisors, according to financial research firm Cerulli Associates.
Matthew Belnap, Analyst at Cerulli Associates.
While ETF flows already outpaced mutual fund flows during 2019, Cerulli’s research found that more than one-quarter (27%) of advisors did not allocate to ETFs during the year, citing client concern over cost as a primary objection.
The advent of commission-free trading in late 2019 effectively removes this barrier as financial advisors no longer need to explain the transaction fees associated with the products, nor work these costs into their budgets for fee-only clients.
At the same time, advisors’ are now better able to uphold their value proposition among increasingly cost-aware clients as the media and associated advertising campaigns around commission-free trading have heightened awareness of investment advice and vehicle fees.
Matthew Belnap, Analyst at Cerulli Associates, commented, “There is substantial room for growth in the ETF space among financial advisors, and the race to zero will likely serve as the catalyst for increased adoption.”
Charles Schwab disrupted the online broker space in October 2019, announcing the elimination of commissions for stocks, ETFs, and options listed on US and Canadian exchanges. Rivals TD Ameritrade (which Charles Schwab has since agreed to acquire), E*Trade, and Fidelity made similar commitments shortly thereafter.
Cerulli believes that commission-free trading will also redefine how financial advisors use ETFs with many pursuing portfolio objectives once associated with high transaction costs.
“Transaction costs in the past may have prevented advisors from taking advantage of tax-loss harvesting or strategic rebalancing opportunities,” said Belnap. “Zero-fee trades allow advisors to be more flexible and strategic in pursuing client objectives.”
Cerulli expects advisors to allocate more to ETFs providing exposure to niche asset classes because the flexibility and liquidity they provide, combined with no transaction fees, makes them even more attractive.
The research also showed that over half (51%) of advisors offer tax planning as a key service, lending more support to the increased adoption of ETFs in order to minimize client tax obligations. Cerulli notes that using ETFs instead of mutual funds, especially when they cover similar asset classes or market segments, promotes tax efficiency and can minimize capital gains.