US brokers may charge fee from ETF managers as commission-free trading takes a toll

• J.P. Morgan estimates brokers could target 10-20% of ETF expense ratios, generating $2-4 billion annually in new distribution costs from the $21 billion U.S. ETF management fee pool
• Commission-free trading introduced by platforms like Robinhood forced traditional brokers including Fidelity and Charles Schwab to slash trade commissions to zero, pressuring revenue
• Large ETF managers like BlackRock and Vanguard are better positioned to negotiate fees, while mid-sized players like Invesco may face greater pressure from the new fee structure

Summary: US Brokers May Charge ETF Distribution Fees Amid Commission-Free Trading Pressures

Key Development: U.S. brokerage firms and custodians are considering charging distribution fees to ETF managers, representing a significant shift in the $13.5 trillion U.S. ETF market, according to J.P. Morgan analysis.

Background: The past decade saw fintech platforms like Robinhood disrupt traditional brokerages with commission-free trading, forcing legacy players including Fidelity and Charles Schwab to eliminate trading commissions to remain competitive. This shift, combined with massive investor migration from mutual funds to ETFs, has severely pressured broker revenues.

Financial Impact: J.P. Morgan estimates the U.S. ETF management fee pool at $21 billion annually. Brokers are targeting 10-20% of total expense ratios, potentially generating $2-4 billion in new annual distribution costs. These fees would be passed along to ETF managers.

Companies Affected: Major publicly traded ETF managers likely to face higher distribution fees include BlackRock, Invesco, Franklin, and Janus. However, impact will be uneven—larger players like BlackRock and Vanguard are better positioned to negotiate favorable terms, while mid-sized managers like Invesco may face greater pressure.

Market Implications: This represents brokers' attempt to recover revenue lost from zero-commission trading and the ongoing shift from higher-fee mutual funds to lower-cost ETFs. J.P. Morgan noted "greater urgency" among custodians and brokers, with potential acceleration of tax-free transitions from mutual funds to ETFs adding pressure.

Timing: The initiative reflects an "important" strategic move for financial intermediaries seeking to stabilize revenue streams after a decade of commission compression and business model disruption.