In the last few decades, fee-only consultants have pioneered the way Americans invest. Registered investment advisors (RIAs) are bringing in more money into the exchange traded fund (ETF) universe, and mutual-fund firms and broker-traders are taking notice.
Fee-based advice has been “the single biggest driver of ETF sales through financial intermediaries,” remarked Anthony Rochte, a senior managing director at Boston-based State Street Corp.’s money-management unit.” The fee-only advisor has an incentive to keep overall costs low and that makes ETFs much more competitive.”
Registered advisors with the U.S. Securities and Exchange Commission or other state regulators, are legally bound to put a clients’ interest first – RIAs do not take sales commissions or payments from fund providers, says Bloomberg.
Most RIAs charge around 1% to 2% of the client’s portfolio, which makes it a large incentive to guide the clients in the right direction. Christopher Battifarano, senior investment partner at GenSpring, said that “the change to the fee-only model doesn’t guarantee you’re going to get better investment performance, but we do sit on the same side of the table as the client.”
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.