US brokers may charge fee from ETF managers as commission-free trading takes a toll

By Siddarth S

Feb 3 (Reuters) - U.S. brokerage firms and custodians may seek distribution fees from managers of exchange-traded funds, J.P. Morgan said, marking a possible crucial shift in the country's $13.5 trillion ETF market.

The U.S. market over the past decade has seen the rise of new fintech firms that introduced commission-free trading, disrupting established Wall Street business models.

Platforms such as Robinhood HOOD.O attracted millions of retail investors with zero trading fees and simple mobile apps, pulling customers and trading volume away from traditional brokerages.

To combat the shift in the competitive landscape, legacy players such as Fidelity and Charles Schwab SCHW.N have raced to win over clients by slashing trade commissions to as low as zero dollars for exchange-traded funds.

But the discounts have started to weigh on revenue as investors move in large numbers from mutual funds into ETFs. This could prompt brokers to charge distribution fees as they try to recover revenue lost to zero-commission trading and the move away from mutual funds.

J.P. Morgan estimates the U.S. ETF management fee pool to be $21 billion, with brokers targeting 10% to 20% of total expense ratios - the annual cost of running a fund - implying $2 billion to $4 billion a year in new distribution costs.

"This is an important initiative for financial intermediaries as the migration of mutual fund assets to ETFs has been a costly transition following the migration to $0 trading commissions over the last ten years," J.P. Morgan said in a note on Monday.

"We also see a greater sense of urgency for custodians and brokers given the potential for SEC rule changes to accelerate the tax-free transition from funds to ETFs."

While the largest publicly traded ETF managers including BlackRock BLK.N, Invesco IVZ.N, Franklin and Janus are all likely to see a higher distribution fee, the impact is likely to be uneven, J.P. Morgan said.

Big players such as BlackRock and Vanguard could be better positioned to negotiate the fees, while mid‑sized managers like Invesco could face greater pressure, it added.

(Reporting by Siddarth S; additional reporting by Manya Saini in Bengaluru; Editing by Maju Samuel)

((Siddarth.s@thomsonreuters.com;))