The widespread move to zero-commission trading for exchange-traded funds (ETFs) is likely to increase advisor adoption of the vehicle and spur other changes in advisor practices, according to The Cerulli Edge—U.S. Advisor Edition. Enacted by several of the largest RIA custodians, zero-fee trading has quickly become the norm—impacting both direct investors and financial advisors who are increasingly using the vehicle as a building block for client portfolios.

Though ETF flows have outpaced mutual fund flows during the past year, Cerulli’s research indicates that more than one-quarter (27%) of advisors did not allocate to ETFs in 2019, citing client concern over cost as a primary objection. The advent of zero-commission trading in late 2019 removes this barrier—the transaction fees and commissions associated with the products are no longer phenomena advisors need to explain, or something they need to work into fee budgets for fee-only clients. “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,” states Matthew Belnap, analyst.

Decreased trading expenses will enable advisors to pursue 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. Zero-fee trades allow advisors to be more flexible and strategic in pursuing client objectives,” according to Belnap. Cerulli expects advisors to allocate more to ETFs for exposure to niche asset classes because the flexibility and liquidity they provide, combined with no transaction fees, makes them even more attractive.

For the 51% of advisors who indicate that tax planning is a key service offering, ETFs offer opportunities to minimize tax obligations of their clients. As their focus turns upmarket—to high-net-worth clients—they will need to help clients plan for, and minimize, their tax burden. Using ETFs instead of mutual funds, especially when they cover similar asset classes or market segments, promotes tax efficiency and can minimize capital gains.

At the same time, advisors will be forced to uphold their value proposition among an increasingly fee-aware client base. The media blitz and associated advertising campaigns around zero-commission has heightened client awareness of investment advice and investment vehicle fees. In response, Belnap recommends advisors strongly articulate their value proposition and clearly communicate the services embedded in fee arrangements.