Commission-free ETFs a big hit with RIAs

Though not cost-free, products find favor and a key place in client portfolios

By Megan Durisin

Nov 1, 2013 @ 10:18 am (Updated 12:08 pm) EST

exchange-traded funds, etfs, commissions, commission-free, charles schwab, blackrock, fidelity, ishares, td ameritrade

It isn't shocking that financial advisers have become big fans of commission-free exchange-traded funds.

How quickly they have come to embrace the funds, however, is a bit more surprising.

The Charles Schwab Corp. launched its OneSource commission-free ETF platform in February, and Beth Flynn, a vice president of head of third-party ETF platform management for Schwab, called the results "phenomenal."

"It was surprising to us how quickly RIAs added commission-free ETFs into portfolio building," she said.

"It's great for advisers when clients don't see a commission fee on their statement."

From the February rollout through Sept. 30, $5.8 billion flowed into Schwab's 105 commission-free ETFs. More than half of that has come from registered investment advisers.

The firm recently announced the expansion of its lineup to 121 ETFs, and the company plans to add more in coming years, Ms. Flynn said.

"In the future, we definitely want to expand it," she said. "There's a precedent for pretty dramatic growth."

BlackRock Inc.'s iShares Core Series ETFs, which are commission-free and trade on the Fidelity Investments platform, had net flows of $9 billion year-to-date through Sept. 30, according to a statement by BlackRock chief executive Laurence Fink during the company's recent conference call to discuss third-quarter earnings.

Assets held across all iShares ETFs that are traded on Fidelity's platform, including the 65 that are commission-free, have grown 13% this year, he said.

TD Ameritrade Inc. couldn't provide flows for the 101 ETFs on its commission-free platform, which launched in 2010.

Alex Teyf, TD's head of ETF products, said that they have been "healthy" from both the RIA and retail sides.

Low expense ratios and commission fees, though not the only factors, are two ways to remain competitive as ETFs become more competitive on pricing, he said.

"It has been an extremely strong offering for the advisers," Mr. Teyf said. "Because they have an interest in reducing the cost to their clients, they will try to find the best commission-free ETFs."

Mr. Teyf said that he is unsure whether TD will expand its commission-free ETF lineup because the company doesn't share revenue with issuers.

TD will consider it if there is sufficient demand from advisers or retail clients, he said.

Derek Tharp, a financial planner at Mote Wealth Management, has been using commission-free ETFs with smaller clients, typically those with portfolios under $100,000. The firm manages $35 million in assets and holds most of its ETFs in custody at Schwab.

If there is an asset class that Mr. Tharp thinks belongs in a client's portfolio and isn't tracked by a commission-free ETF, he said that he will use a commission ETF instead.

But commission-free ETFs are attractive from an investing and re-balancing perspective for small clients, and Mr. Tharp expects to see more of them hit the market as custodians compete with one another.

"A lot of times, when people come to us, they're not 100% sure of the costs that are there," he said of ETFs. "Commission can be one of the more easy-to-see costs than an expense ratio."

Rick Ferri, founder of Portfolio Solutions, said that he has used commission-free ETFs only sparingly.

His firm also holds its ETF assets in custody at Schwab.

Mr. Ferri's clients are relatively large, and he typically makes trades of thousands of dollars at a time.

What might be cost-effective for an investor trading a couple hundred shares at once may not be as cost-effective for the larger client, he said.

Commission-free ETFs aren't cost-free. Some impose charges for trade orders and management fees while others charge a fee for trading shares before a designated amount of time passes, typically 30 days.

"Commission-free does not mean cost-free," Mr. Ferri said, noting, however, that the difference in cost between commission and commission-free ETFs is minimal. "We're talking about pennies here."

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