collage of clocks, magnifying glass and money

As commissions hit zero for exchange-traded funds, advisors are using ETFs more for investors and making other changes in their practices. So says the latest report from Cerulli, The Cerulli Edge—U.S. Advisor Edition, which also says that as several of the largest RIA custodians adopted zero-fee trading, it's "quickly become the norm—impacting both direct investors and financial advisors who are increasingly using the vehicle as a building block for client portfolios."

While advisors mostly stayed away from ETFs in 2019 because of client concerns over cost, the move to zero-commission trades late in the year has cleared the way for "substantial room for growth in the ETF space among financial advisors," according to analyst Matthew Belnap. He is cited saying in the report that "the race to zero will likely serve as the catalyst for increased adoption."

Not only is there room for growth, among advisors who also do tax planning, those zero-commission ETFs provide the opportunity to minimize tax obligations. And that's not all; Belnap continues, "Transaction costs in the past may have prevented advisors from taking advantage of tax loss harvesting or strategic rebalancing opportunities. Zero-fee trades allow advisors to be more flexible and strategic in pursuing client objectives."

The report adds that Cerulli expects advisors to allocate more to ETFs for exposure to niche asset classes because the flexibility and liquidity they provide, combined with no transaction fees, makes them even more attractive.

But of course while the lingering presence of fees can drive fee-aware investors to (or away from) advisors, the latter will have to prove their worth in other ways, as Morningstar points out. It says that advisors will have to "effectively communicate" their value to clients to ensure those clients know they're on the same page with regard to goals.

Morningstar suggests that advisors have a conversation with clients about how important goals-based planning is, and point out that such a strategy can boost a client's wealth by more than 15 percent. They should also discuss behavioral coaching with clients, but only after emphasizing how such a technique can be beneficial to the client—and last but not least, they should deemphasize maximizing returns as an investor's goal by highlighting the importance of not taking on risk.

According to Morningstar, "[f]inancial advisor value is currently misunderstood. The role of an advisor is no longer just to be an investment expert; it's also to serve as a behavioral coach, financial counselor, budgeting master, and more." If clients don't understand this, even zero-fee ETFs won't keep them for long.

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Advisors turning toward zero-commission trading, other changes

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