Are ETFs Making Stock Brokers Obsolete?

January 9th at 6:00am by John Spence

David Bowie, who turned 66 this week and is releasing his first album in ten years, in the unlikely hit “Changes” sang about having to be a different man.

The same can be said about stock brokers who as a group are facing a tectonic shift in their industry as ETFs continue to rise in popularity and allow investors to buy whole slices of the market with one online trade. Some discount brokers even let customers trade ETFs for free. [Schwab Mulls Commission-Free ETF Platform]

“Some stock brokers are likely feeling quite queasy as they regard their near and long-term futures. Will they become extinct in the next 10 to 20 years?” Jake Zamansky writes for Forbes. “Retail investors are fleeing in droves from stock and bond mutual funds pushed by their stock brokers and piling into ETFs … which offer the same investments.”

The underperformance of active fund managers has also played a part in driving disgruntled investors to index-based ETFs. [You’re Fired: Investors Drop Underperforming Fund Jockeys and Buy ETFs]

“And ETFs are cheaper – much cheaper – than actually managed mutual funds,” said Zamansky, adding that broker-sold mutual funds can also have sales commissions that layer on extra fees.

“Wall Street has simply screwed up so many times over the past 12 years that it is ruining its relationship with the investing public,” he wrote. “So, will brokers soon be obsolete like dinosaurs?”

Indeed, in the financial advisory business, the shift to fee-based compensation has helped fuel the rise of low-cost ETFs.

“For the most part, this transition has been a benefit to the general investing public as it has removed much of the inherent conflict from the days of transactional stockbrokers,” Josh Brown at the Reformed Broker explained in a WSJ blog post. “High-cost products like A-share mutual funds with 5% sales loads are also waning in popularity as more clients become advisory versus brokerage and more practitioners utilize ETFs on their behalf – vehicles without sales loads of any kind that also tend to carry lower internal expense ratios.” [Shift to Fee-Based Advisor Model Supports ETFs]

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Tickers