since then Charles Schwab Since launching the first true discount broker in 1974, trading fees and commissions have been steadily lowered, and by 2019, nearly all major retail brokers Zero-fee trading.
Now that appears to be reversing. Fidelity Investments Recently Announced The company plans to introduce a $100 “surcharge” on certain items. ETF TradingStrictly speaking, this isn’t a trading fee, but it is effectively a trading fee. And $100 isn’t cheap, especially for a small order. Let’s say you buy one share of an ETF for $50 and then you pay a 200% commission on that purchase in the form of an additional $100.
Most investors won’t notice a difference because the tax (at least for now) only applies to nine ETF issuers, none of which are in the top 50 by market share. These are the smaller, lesser-known ETFs that you’re probably less likely to buy. Affected ETF Issuers Adaptive, AXS Investments, Cambiar, Day Hagan, Rayliant, Regents Park, Running Oak, Simplify Asset Management and Sterling Capital.
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But it does have implications for investors, and the case reveals a lot about the “money-for-money” incentive structure of the securities industry.
Let’s dig deeper.
Why does Fidelity charge extra?
Mutual funds have always paid a fee for the privilege of being available on brokerage platforms. Sales Fees or 12b-1 FeesTraditionally, mutual funds have encouraged brokerages to handle their products and sell them to individual stockbrokers and investment advisers.
A sales charge is a fee that is deducted from the amount you invest. For example, if a mutual fund charges a 5% commission, you actually invest only 95 cents of every dollar, and the other 5% goes into the broker’s pocket. Mutual funds that charge commissions have really fallen out of favor. Recent Research According to a survey by the Investment Company Association, 92% of mutual fund sales come from investments. No Load Fund.
Another industry trick is the 12b-1 fee, which is essentially a trailer that brokers receive for each year a client holds a fund. In theory, this encourages brokers to hold funds instead of constantly switching accounts in search of new fees. But it still puts money out of investors’ pockets and into brokers’ pockets.
ETFs have long been touted as a cheaper alternative to traditional mutual funds, and this is largely true. Because ETFs trade like stocks, they enjoy zero or near-zero trading fees with most brokerages, so there are no commission fees. Also, ETFs are often index funds, which means they have very limited trading costs, which helps keep internal expenses very low. The expense ratio for the popular iShares Core S&P 500 ETF (IVV) is: 0.03%For example, for every $1,000 you invest, you would lose just 30 cents in annual fees.
This is where the price you pay to play comes into effect.
Even though ETFs trade on a stock exchange just like stocks, some brokers have “maintenance agreements” whereby the ETF manager shares a portion of the management fee with the broker in exchange for the privilege of making the ETF available with the broker. In Fidelity’s case, the company demands 15% of the fees collected by the manager. ETF managers who do not have this agreement charge an additional $100 for their ETFs.
What does this mean for investors?
Apparently, no matter how many Fiduciary Duties Rules Without regulatory mandates, there will always be an incentive for brokers and managers to act against the interests of investors. Management fees for mutual funds and ETFs have fallen significantly over the past few decades, allowing large ETFs like IVV to make a profit for their managers with fees as low as 0.03%.
But if Fidelity’s move marks the start of a new trend in the industry, overall costs to clients are likely to rise: ETF managers will have to pay commissions to brokers, leaving them with less income to cover costs and pay staff. In practical terms, that means fees will probably have to increase.
Now, Fidelity’s move will initially only affect a relatively niche small number of companies, but another unintended consequence is that it will strengthen the large incumbents in the industry to the detriment of smaller newcomers, potentially reducing the options available to investors and reducing competition.
The bigger picture may signal that a decades-long, larger trend of lowering and lowering fees for investors has finally come to an end. Of course, this doesn’t mean going back to the pre-1974 era of ridiculously high flat fees, but at the margin, it does mean that investors are getting a little less money in their pockets.
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