Economy

Will Fidelity’s New Fee Strategy Crush ETF Innovation?

2 Mins read

Fidelity Investments, a titan of the investment world, is flexing its muscles in a way that’s riling the ETF industry. The company is pushing for payments from ETF firms in exchange for listing and maintaining their products on its massive platform. This move has sparked outrage among many ETF issuers, raising concerns about rising costs and stifled innovation.

Fidelity isn’t new to charging maintenance fees. Mutual fund companies have long paid for the operational support Fidelity provides by listing their products. But in the cost-conscious world of ETFs, these fees are less common. Fidelity’s bid to tap into this revenue stream has ETF firms worried about additional expenses eating into their already-slim margins.

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“It’s like we’ve come full circle,” observes Ben Johnson of Morningstar. “We’re seeing asset managers back to sharing a slice of their revenue pie with platforms just to be on their shelves.”

The negotiations reportedly involve Fidelity taking a 15% cut of the total ETF revenue. Fidelity has also hinted at potentially penalizing investors who buy from non-compliant firms, with whispers of a $100 charge per trade. This strong-arm tactic has left a bitter taste in many mouths.

Zero Commissions and Shifting Preferences

Fidelity’s push comes at a time when investors are increasingly ditching mutual funds in favor of cheaper, tax-friendly ETFs. This shift, coupled with Fidelity’s 2019 decision to slash ETF trading commissions to zero, has them looking for new revenue streams within their platform.

“We’re just trying to have a fair conversation and reach a consistent approach across all products,” counters a Fidelity spokesperson, highlighting their focus on dialogue.

Graeme Sloan/Bloomberg

However, ETF firms see this as anything but fair. They fear the revenue-sharing plan will stifle innovation by making it harder for newcomers to compete. The potential $100 servicing charge has also been met with broad industry backlash.

While Fidelity and Charles Schwab dominate the RIA custody market, a recent startup is shaking things up. This new player, valued at over $1.5 billion, specifically targets smaller advisory firms. Industry veterans recall the “easy money” days when custodians made big profits off traditional mutual funds. ETFs, with their exchange-traded nature, disrupted that model. Now, it seems, Fidelity might be trying to bring that model back.

The situation remains fluid. Whether Fidelity will get its way or if a compromise can be reached is yet to be seen. But one thing’s for sure: the ETF industry is watching this battle closely, with a lot riding on the outcome.

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