Brokerage firms and custodial platforms in the United States are considering asking exchange-traded fund managers to pay distribution fees as they confront shrinking revenue, J.P. Morgan said in a note. The shift would represent a notable change in how fees are allocated in the country’s roughly $13.5 trillion ETF market.
Over the last decade, a wave of fintech entrants introduced commission-free trading and streamlined mobile interfaces, attracting significant retail trading volume. Platforms such as Robinhood built large retail customer bases by eliminating trading commissions, drawing clients and activity away from traditional brokerages. In response, incumbent firms like Fidelity and Charles Schwab also lowered fees, offering zero-dollar trades for exchange-traded funds to retain and win customers.
Those discounts, combined with a sizable migration of assets from mutual funds into ETFs, have reduced revenue for intermediaries. J.P. Morgan said brokers and custodians may therefore target distribution fees from ETF managers to recapture income lost to the era of zero trading commissions and the mutual fund-to-ETF transition.
J.P. Morgan estimated the total U.S. ETF management fee pool at $21 billion. It suggested brokers could seek between 10% and 20% of total expense ratios - the annual costs associated with running a fund - which would translate into approximately $2 billion to $4 billion a year in additional distribution costs for ETF managers.
"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 the note. The bank also cautioned that custodians and brokers may feel increased urgency because potential SEC rule changes could speed a tax-free shift from funds to ETFs.
J.P. Morgan expects the effect of any new distribution fees to be uneven across managers. Large, publicly traded ETF providers including BlackRock and Vanguard may be in a stronger position to negotiate or absorb such fees, while mid-sized firms like Invesco could experience greater pressure, the bank said. Other named managers included Franklin and Janus.
As the brokerage industry considers new revenue models to compensate for lost commission income, the proposed distribution charges would represent a direct cost for ETF managers and could reshape relationships between asset managers and distribution platforms. The magnitude and timing of any such fee arrangements will depend on negotiations between custodians, brokers, and fund managers, as well as any regulatory developments that affect the structure of fund conversions and distributions.