The financial services industry is outraged by Fidelity’s recent decision to impose an annual fee on ETF issuers or charge investors a $100 service fee for purchasing shares of some of the ETFs on its platform. However, industry sources say the decision is unlikely to change whether RIAs are working with the custodian.
Earlier this month, Fidelity announced a new policy that starting in June, it would charge the fee for buying ETFs offered by issuers that declined to participate in a “maintenance arrangement” with the custodian. The maintenance arrangement would have the issuers pay Fidelity an annual fee of 15% of their fund expense ratios.
The vast majority of ETF issuers are going along with the maintenance fee. Initially, reports said ETFs from nine issuers would have been affected. At least one of those issuers, AXS Investments, later agreed to the fee. That means that affected ETFs will be from Simplify Asset Management, Day Hagan, Sterling Capital, Cambiar, Regents Park, Rayliant, Adaptive and Running Oak.
When reached for comment, a Fidelity spokesman said, “We remain committed to providing clients choice with an open architecture platform. Support fees help maintain the technology and service operations needed to ensure a secure a positive experience for investors.”
With the exception of Simplify (with 26 ETFs) and Regents Park (10 ETFs), the affected sponsors operate only a handful of ETFs each. The cumulative assets amount to $5.8 billion, with Simplify alone accounting for $4 billion of that total.
The story has gotten a lot of attention from both media sources and social media users over Fidelity’s use of a seeming “pay-to-play” scheme.
Carlos Marbot, founder and financial planner at Fig Financial Planning in Greenville, S.C., posted on X (formerly Twitter) about the fee.
Another X user who identifies themselves as an anonymous blogger from the financial industry and goes by the account name TheWallStreetRanter, also sounded off on the platform.
However, sources WealthManagement.com spoke to said Fidelity’s fee announcement hardly broke new ground among custodial platforms.
While commission-free online trading has been the commonly accepted practice in the industry since 2019, it’s common for custodians to ask ETF and mutual fund managers to “pay-to-play,” according to Lara Crigger, editor-in-chief at financial consulting firm VettaFi.
“Revenue sharing, or pay-to-play, is just deeply entrenched in the investment industry, in mutual funds and in ETFs,” she said. “This has been the state of play for decades. Other trading platforms, including Charles Schwab and some of the other ones, have similar revenue-sharing agreements that require ETF issuers to pay a certain amount of their fund revenue to be listed on the platform.”
According to the Charles Schwab website, all ETFs are subject to management fees and expenses. Schwab charges third-party non-transparent ETFs or their sponsors for platform support, shareholder communications, reporting and other administrative services. These fees typically amount to 10% of the assets held at Schwab per year.
There are already various other fees custodians might be charging investors to access funds on their platforms, ranging from per-trade fees on options trading to fees for using a phone broker, Crigger noted. “This is just sort of another fee to add to the schedule.”
However, while retail investors buying into one of the affected ETFs on their own might grumble about paying Fidelity an extra $100 in service fees, in theory, it’s a much more expensive proposition for RIAs who are investing on behalf of multiple clients and might be buying ETFs not just to take advantage of opportune market timing, but to rebalance firm portfolios. In practice? Those ETFs are too small to impact many RIAs’ investment decisions.
Most of the ETFs that will be subject to Fidelity’s $100 service fee are niche ETFs with $100 million or less in assets, while there are funds in the market with multi-billions of assets, said Jeremy Keil, a financial advisor at New Berling, Wis.-based Keil Financial Partners. “I just don’t think it’s really a big deal. It’s these specialty ETFs I’ve basically never heard of before. It’s really not affecting a large number of positions.”
Crigger noted the financial advisors she has spoken to appear annoyed about what is widely seen as Fidelity’s attempt to knee-cap the fund managers to pay up. But if they happen to be investing in one of the ETFs affected, they are more likely to abandon the ETF if the fees prove too onerous than to abandon Fidelity as a custodian.
Keil agrees. For RIAs, moving accounts to another custodial platform is a pain and “chances are, these custodians are going to do something similar.”
Like Crigger, he notes that “free online trading” has been an illusion as custodians have had to find new ways to make money.
“That’s the problem with this zero-dollar commission trading—all they are doing is just hiding the actual cost,” he said.