Brokerage firms stand to lose up to $30 billion annually in fees if regulators approve the widespread adoption of exchange-traded fund (ETF) share classes for mutual funds, according to a new report by Cerulli Associates.
The shift would represent a significant inflection point for wealth management distribution economics, as the traditional fee arrangements tied to mutual fund sales come under pressure from the growing appeal of ETFs.
The dual-share class structure, pioneered by Vanguard and protected under a now-expired patent, enables asset managers to offer both mutual fund and ETF share classes within a single portfolio. This approach allows investors to choose the investment vehicle that best aligns with their objectives—balancing tax efficiency, liquidity, trading flexibility, and pricing transparency.
Since the expiration of Vanguard’s patent in 2023, multiple fund managers have filed applications with the Securities and Exchange Commission seeking approval to implement similar structures across their fund lineups.
While ETF share classes promise operational and tax advantages for clients—particularly in taxable accounts—the implications for broker-dealers and other intermediaries could be severe. Mutual funds often carry embedded distribution fees, such as 12b-1 and sub-transfer agency (sub-TA) fees, which generate significant recurring revenue for intermediaries. ETFs, by contrast, are generally free of such embedded charges, limiting opportunities for platform revenue generation.
Cerulli’s analysis estimates that a full-scale conversion of all non-retirement and non-institutional mutual fund assets to ETF share classes could reduce broker-dealer revenues by $15 billion to $30 billion per year. While acknowledging that this is an extreme scenario unlikely to unfold quickly, Cerulli underscores the disruptive potential of even a partial adoption of the model. “While a 100% conversion is improbable in the near term, the directional shift represents an economic challenge for traditional brokerage platforms,” the report states.
For RIAs, the dynamic is different. Because fee-only advisors typically charge clients directly based on a percentage of assets under management, they are less reliant on back-end distribution fees from asset managers.
This positions RIAs to be early adopters of ETF share classes, particularly given their longstanding preference for low-cost, tax-efficient investment vehicles. “Managers most enthusiastic about the opportunity are focused on the RIA segment—the heaviest ETF users—as opposed to the wirehouse and broker-dealer segment,” Cerulli notes.
The introduction of ETF share classes would allow RIAs to maintain investment consistency across accounts while optimizing for structure-specific benefits. Clients with taxable accounts might prefer the ETF class for its tax efficiency, while those in retirement accounts or less sensitive to tax drag might continue using the mutual fund version. Either way, the underlying exposure remains the same—a significant operational advantage for portfolio construction and model delivery.
Cerulli anticipates that initial adoption of ETF share classes will be gradual, with a limited number of fund complexes launching dual-share options targeting the RIA market. Nevertheless, the long-term implications could reshape how advisors access asset management products and how platforms are compensated for their role in product distribution. If ETF share classes gain traction, asset managers could face increasing pressure to reevaluate their distribution economics and platform relationships.
One asset management executive interviewed in the report raised concerns about the potential unintended consequences of shifting to a revenue-sharing model in the ETF space. “If broker-dealers begin to expect revenue sharing on ETF share classes, how can they justify not demanding the same on conventional ETFs? That could be incredibly disruptive,” the executive warned.
The rise of ETF share classes may also accelerate the blurring of lines between mutual funds and ETFs, both operationally and from a regulatory standpoint. Unlike conventional ETFs, which are required to disclose their holdings daily and trade throughout the day, mutual fund share classes could maintain end-of-day pricing and allow for batch processing. Whether regulators ultimately approve such hybrid structures remains to be seen, but Cerulli suggests the trend is gaining momentum.
From a strategic perspective, fund companies eyeing ETF share classes are likely to prioritize channels where ETF usage is already prevalent and cost sensitivity is high. That makes the independent RIA market a natural testing ground. As asset managers adapt to evolving advisor preferences and regulatory developments, the competitive imperative to offer ETF options alongside traditional mutual funds may prove difficult to ignore.
For RIAs, the emergence of ETF share classes offers a compelling opportunity to further streamline portfolio implementation, reduce client tax burdens, and access diversified exposures without sacrificing operational efficiency. The model could also aid in building consistent model portfolios across account types, reducing the administrative burden of managing separate mutual fund and ETF allocations for clients with different tax profiles.
Yet for broker-dealers and traditional advisory channels tied to commission-based revenue streams, the shift may require a reevaluation of core business models. “This development poses an outsized economic challenge to B-Ds,” Cerulli warns, highlighting the difficulty firms may face in replacing forgone 12b-1 and sub-TA fee revenue with alternative sources.
As the competitive landscape evolves, brokerage firms may be forced to consider new compensation arrangements. Cerulli floats the possibility of revenue-sharing agreements between fund providers and broker-dealers for ETF share classes, though it acknowledges that the mechanics of such arrangements are still unclear and potentially controversial.
For wealth managers, particularly those operating in a fiduciary capacity, the implications are clear: product structure innovation is creating opportunities to deliver more cost-effective and tax-aware investment solutions. Advisors will need to stay informed on the development of ETF share class availability, evaluate which clients stand to benefit most from the new structures, and assess the operational impact on portfolio design and account servicing.
In the interim, Cerulli expects modest ETF share class adoption, with significant activity concentrated among early-adopting RIAs and asset managers eager to differentiate their offerings. But as investor demand for ETF structures continues to grow—and as platforms face mounting scrutiny around conflicts of interest and fee transparency—the pressure on the traditional mutual fund distribution model will only intensify.
For forward-thinking advisors, the evolution of share class architecture represents an opportunity to modernize investment delivery while reinforcing the value of fiduciary advice. For asset managers and intermediaries, it may demand a more fundamental shift in product design, pricing strategy, and partnership economics.
The bottom line for wealth management professionals: ETF share classes could unlock new tools to enhance client outcomes, but they also threaten to upend longstanding revenue models. As regulatory and competitive forces converge, firms that embrace structural innovation—and align it with their clients’ best interests—will be best positioned to lead in the next chapter of fund distribution.
