Price Wars: ETF Edition
3. The Fiduciary Rule
Traditionally, ETF issuers used financial advisors as a sales funnel to retail clients. In this scenario, the financial advisor would develop a relationship with an ETF issuer, say BlackRock, and gain a thorough understanding of the products they offer, their structure, and their purpose in a client’s portfolio. Now, suppose the client asks for exposure to high-yield bonds. Their advisor would be more likely to recommend BlackRock’s $HYG, rather than Vanguard’s $VCLT which they know nothing about.
As a result of the sales funnel, the client often ended up purchasing ETFs from whichever issuer was most familiar to their financial advisor, regardless of the expense ratios. For mutual fund investors, the value chain was even more congested. “Soft dollar” arrangements allowed fund managers to artificially reduce their expense ratios by paying for services with order flow. As a result, many investors were paying hidden, undisclosed fees which ate into their returns.
Luckily for investors, this kickback scheme sparked an outrage that resulted in new regulation nicknamed “the fiduciary rule.” The fiduciary rule requires financial advisors to act in the best interest of their client at all times. In short, the fiduciary rule requires financial advisors to suggest low-fee products, and ETF issuers are dropping their fees in order to keep the advisor sales funnel alive.
Thanks to consumer-friendly regulations, an expanding industry, and the Walmart effect, the ETF price war is saving investors billions of dollars as the fees on their investments continue dropping towards zero.