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 buying shares of some of the ETFs on its platform. However, industry sources say the ruling is unlikely to change if RIAs are working with the custodian.
Earlier this month, Fidelity announced a new policy that, starting in June, would charge a fee for buying ETFs offered by issuers that refused to participate in a “maintenance agreement” with the custodian. The maintenance agreement would require issuers to pay Fidelity an annual fee of 15% of their fund's expense ratios.
The vast majority of ETF issuers are going along with the maintenance fee. Initially, reports said ETFs from nine issuers would be affected. At least one of those issuers, AXS Investments, later agreed to the fee. This means the ETFs affected will be from Simplify Asset Management, Day Hagan, Sterling Capital, Cambiar, Regents Park, Rayliant, Adaptive and Running Oak.
When reached for comment, a Fidelity spokesperson said: “We remain committed to offering customers the choice of an open architecture platform. Support fees help maintain the technology and service operations needed to ensure a positive and secure 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. Cumulative assets total $5.8 billion, with Simplify alone accounting for $4 billion of that total.
The story has drawn a lot of attention from both media sources and social media users regarding Fidelity's use of an apparent pay-to-play scheme.
Carlos Marbot, founder and financial planner at Fig Financial Planning in Greenville, SC, posted on X (formerly Twitter) about the fee.
Another user X who identifies himself as an anonymous blogger from the financial industry and goes by the account name TheWallStreetRanteralso heard on the platform.
However, the resources WealthManagement.com spoke with said Fidelity's fee announcement hardly broke new ground among custody platforms.
While nominally the law now guarantees commission-free online trading, 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 advisory firm VettaFi.
“Revenue sharing, or pay to play, is just deeply ingrained in the investment industry, in mutual funds and ETFs,” she said. “This has been the state of play for decades. Other trading platforms, including Charles Schwab and some others, have similar revenue-sharing agreements that require ETF issuers to pay a certain amount of their funds' revenue to be listed on the platform .
According to Charles Schwab's website, all ETFs are subject to management fees and expenses. Schwab charges non-transparent third-party 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 fees that custodians can charge investors to access funds on their platforms, ranging from trading fees in options trading to fees for using a telephone broker, Crigger noted. “This is just another charge to add to the schedule.”
However, while retail investors buying into one of the affected ETFs themselves may complain about paying Fidelity an extra $100 in service fees, in theory, it's a much more expensive proposition for RIAs that are invest on behalf of multiple clients and may purchase ETFs not only to take advantage of market timing but to rebalance firm portfolios. In practice? These ETFs are too small to influence the investment decisions of many RIAs.
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 on the market with multibillion in assets, said Jeremy Keil, a financial adviser at New Berlin, Wis. Keil Financial Partners based . “I just don't think it's really a big deal. There are these specialized ETFs that I've basically never heard of before. It's not really affecting a large number of positions.”
Crigger noted that financial advisers she has spoken with seem upset about what is widely seen as Fidelity's effort to force fund managers to pay up. But if they happen to be investing in one of the affected ETFs, they are more likely to abandon the ETF if fees prove too difficult 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 will do something similar.”
Like Crigger, he notes that “free online trading” has been an illusion as caregivers have had to find new ways to make money.
“That's the problem with zero-dollar commission trading — all they're doing is just hiding the actual cost,” he said.