Brokers, on the other hand, are only required to sell products that are “suitable” for a client and will take commission based on sales.
While major brokerage firms maintain that competition from RIAs remains overstated, some fund managers have responded by lowering and waiving commissions or creating share classes without charges. The brokerage firms may be putting up a brave front, but fee-only advisors are starting to eat away at traditional brokerage business models.
ETFs have benefited the most from fee-based advice since the investment products are low-priced, tax efficient and easily traded on a stock exchange. RIAs typically allocate an average of 16% of clients’ assets to ETFs, or more than double that of other advisors.
In the United Kingdom, regulators will bar payments from fund and insurance companies to financial advisors for recommending their investment products in 2013, and Australia has enacted a similar policy effect next year. As a result, Deborah Fuhr, BlackRock’s global head of ETF research, remarked that they “definitely see ETFs being embraced more because of this” and new firms are popping up to help financial advisors select ETFs.