By Andrew Welsch
The rise of exchange-traded funds and commission-free trading has been a boon for the individual investor. For brokerage firms, it is a bit of a mixed bag. Trading platforms at Charles Schwab and other firms have never been more popular. Yet these firms have been losing valuable revenue sources as trading commissions have gone to zero on assets including stocks and ETFs and as the investor shift away from mutual funds has eroded the related fees brokerage firms earn.
Under pressure, brokerage firms are now seeking to impose distribution fees on the companies that manage ETFs, who may have no choice but to acquiesce lest they lose access to investors, according to analysts at J.P. Morgan.
"Our view is that ETF managers will all eventually pay ETF distribution fees, because financial intermediaries such as brokerage firms and custodians have enough influence over shelf space to influence market share shifts," J.P. Morgan analysts led by Kenneth Worthington write Feb. 2. "Because we expect reluctance from ETF managers such as Vanguard to participate in distribution fees and related services, we see the potential, if not the likelihood, that [other] asset managers working with distribution could increase market share, potentially meaningful market share, from those not willing to partner."
What distribution fees look like ultimately depends on negotiations among brokerage firms and asset managers, but they will likely apply to both active and passive funds -- and soon, Worthington writes. "[T]here is likely some level of urgency here as the SEC is considering rules that would allow tax-free transfers from mutual funds to ETFs, which we think would accelerate the migration to ETFs," he writes.
Mutual funds traditionally generated substantial fees for brokerage firms. But ETFs have been steadily gaining ground since the first U.S. ETF (the SPDR S&P 500 ETF Trust) launched in 1993. Investors have come to prefer ETFs because they are more tax-efficient, easier to trade, and typically come with lower expense ratios. Today, there are more than $13 trillion in assets in ETFs, Worthington writes.
Mutual funds still hold more assets -- more than $25 trillion, according to J.P. Morgan -- but much of those assets belong to retirees. And ETFs have been steadily gaining market share. Asset managers have been launching record numbers of new ETFs, including actively managed funds, to meet rising investor demand.
Because competition in the asset management industry has been fierce, companies have been under pressure to lower fees on their funds. Should brokerage firms impose distribution fees on ETF issuers, the issuers would have to choose between eating the cost themselves or passing it along to investors in the form of higher expense ratios.
Commission-free trading has become the norm in the brokerage industry, presenting a challenge (how to replace that lost revenue?) but also an advantage in negotiations with ETF managers because brokerage firms have millions of new customers.
"Ultimately, the ability to charge distribution fees is contingent upon a broker's/custodian's ability to restrict its customers' access or increase the cost or friction of access to ETFs whose managers don't compensate the intermediaries," Worthington writes.
Distribution fees would present a headache for asset managers, who have already been under years of pressure to cut the fees they charge to investors in their funds. BlackRock and other large asset managers may have more capacity to absorb the hit from distribution fees than smaller boutique asset managers. BlackRock is the nation's largest ETF manager; Vanguard is the second largest.
Some companies that operate both distribution platforms and ETF businesses may be somewhat immune to distribution-fee pressures. "While Schwab is a larger ETF manager, we calculate that 65% of its ETF assets are custodied on its platform and thus we don't see Schwab paying" distribution fees, Worthington writes.
Privately held Fidelity Investments operates large asset-management, retirement plan, and wealth management businesses. In 2024, it reached revenue-sharing agreements with nine small asset management companies after it had threatened to charge investors a fee to trade the asset managers' ETFs.
Write to Andrew Welsch at andrew.welsch@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
February 02, 2026 13:38 ET (18:38 GMT)
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