ETFs Shifting Power to Independent Advisors

by: Zack Miller

Fee-only advisors, investment advisors who don’t charge commissions, are leading the way Americans are investing. Instead of buying mutual funds with sales loads, more and more investors are turning to pros selling low cost exchange traded funds (ETFs).

According to Bloomberg, ETFs are certainly benefiting from this shift away from the brokerage industry:

The advisers are the fastest-growing competitor to the four largest broker-dealers, or wire houses — Morgan Stanley Smith Barney LLC, Bank of America Corp.’s Merrill Lynch, Wells Fargo & Co. and UBS Financial Services Inc. Assets overseen by the brokers declined 17 percent to $4.75 trillion in the two years through 2009, according to Aite Group LLC in Boston.

"More than five years ago, RIAs were a niche piece at best," said Scott Smith, associate director at Boston-based Cerulli.

Not paying commissions doesn’t necessarily mean that investors are going to get better performance but it does serve to better align incentives. And that’s important in a business that with all its focus on performance is still predicated on trust.

This move to what Robert Pozen and Theresa Hamacher call Open Architecture in their new book, "The Fund Industry: How your Money is Being Managed." I plan on having Theresa on an upcoming Tradestreaming Radio episode (stay tuned). It’s a huge work detailing everything from the history of the mutual fund, to its corporate and tax structure, to career paths in the financial industry, to how portfolio managers buy stocks and bonds.

I like the concept of open architecture in the financial services industry.

With brokers less reliant on commissions, performance and cost became more important in determining what funds were sold. That created opportunities for firms with good track records that had refused to charge commissions and relied on direct sales to individual investors. No-load fund families such as Vanguard and Baltimore’s T. Rowe Price Inc. were well-positioned for the shift.