Fidelity clawback of free ETF trading costs to hit investors – Financial Times

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Fidelity plans to start charging investors a $100 exchange-traded fund purchase fee per trade if sponsors don’t agree to pay “support money,” offering customers lower-cost trading, the retailer said. Opposed to the long-standing policy of the company.

Fidelity’s securities division requires ETF sponsors to pay 15% of the fund’s gross income to avoid the $100 fee, according to people familiar with the funding agreement.

The fee will be $100 for ETF purchases of $2,000 or more and 5% of the transaction amount for smaller purchases, according to a person familiar with the fee structure.

Fidelity declined to comment on the size of the grant..

The proposed increase in ETF purchase fees comes after brokers have been lowering trading fees for more than a decade to attract customers. To compensate, many companies enter into revenue-sharing agreements with fund sponsors and charge issuers a fee for incorporating products into their platforms. This is the type of arrangement that has received oversight from the Securities and Exchange Commission in the past.

However, some brokerages are now bucking this trend and starting charging fees for some types of trades. Fidelity, which along with Charles Schwab is one of the leading platforms for U.S. investors to access the $8.9 trillion U.S. ETF market, said it began asking fund sponsors for support payments several months ago. issuer told the Financial Times.

Fidelity maintains that the new fees are important to maintaining and developing its commission-free ETF trading platform.

Some ETF providers affected by Fidelity’s new service fee plan, which took effect in June and was first reported by Bloomberg, are forgoing support fees — especially smaller issuers like Fidelity. investors have little choice but to pay for exposure on major platforms.

Some issuers say they are still negotiating with the company about the size of their support, which varies by sponsor and could increase costs for investors in future ETF launches. .

Fidelity’s operations include a large brokerage platform and a $69 billion ETF division as part of its $4.9 trillion in assets under management.

“We’re not just hammering away,” said David Young, founder and CEO of Southern California-based Regent’s Park Funds, one of the nine ETF companies being highlighted by Fidelity. It’s just that we’re being criticized again.” “The next ETF we launch will be brought to market with the highest fees that can be justified.”

Fidelity’s latest brokerage business Price list The company says that support fees are intended to cover “shareholder support services, provision of calculation and analytical tools, general investment research and educational materials about ETFs,” and that “these ETFs are used to promote specific ETFs.” “We are not being paid by sponsors.” to the customer. ”

“We remain committed to providing choice to our clients with our open architecture investment platform,” a Fidelity spokesperson said. “Support fees help us maintain the technology and service operations necessary to ensure a safe and positive experience for our investors.”

Charles Schwab also offers commission-free ETF trading on its platform and already charges a small number of ETF sponsor fees of 10%, but would not comment on whether it was considering a similar fee program. “There will be a fee,” he said. All HE ETFs available on Schwab’s platform are $0 for US-listed ETFs that are traded online. ”

Elizabeth Kashner, director of global funds analysis at data provider FactSet, said the concept of a $100 fee to buy an ETF is “far out of sync with investors’ expectations of how much it costs to trade an ETF.” “There is,” he said. He noted that if asset managers raise their expense ratios to offset the new fees, “each additional basis point is a competitive disadvantage.”

“If Fidelity trading fees are socialized across the fund base as an increase in fund expenses, it will make the fund more expensive for everyone,” Kashner said.

The nine issuers for which investors will pay a new $100 fee specialize in active management, and none are in the top 50 by market share in the U.S., according to Morningstar. Small active ETF managers are the fastest growing in this space and are generally considered innovators in the ETF industry.

“If this becomes widespread, we could see a slowdown in product development due to additional costs to launch, maintain and grow ETFs,” said Todd Rosenbluth, head of research at New York-based consultancy VettaFi. “There is,” he said.

Wes Gray, CEO of ETF shop Alpha Architect, said his firm was able to negotiate with Fidelity over the past few months to avoid paying support fees. Still, he lamented the development of the commission program, saying he thought it could hurt Fidelity’s reputation.

“I really think they’re going to walk all the way back here,” Gray said.