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Fidelity fee-free funds will have limited impact on the industry
Fidelity fee-free funds have shaken the investment industry, but the move is not groundbreaking and it is part of a wider trend that asset managers have to respond to, according to GlobalData Financial Services.
In early August 2018, Fidelity Investments became the first company to introduce mutual funds that charge investors no management fees.
Fidelity has launched two index-tracking funds: one focused on US equities, the other on international stock markets.
The company wants to use free funds as a marketing tool to bring in new clients to its US brokerage platform (where these products are exclusively available at the moment).
Then the company can earn revenue from other products and services, for example financial advice or commissions for trading other funds or asset classes.
In principle, a similar approach led to Charles Schwab launching its free Schwab Intelligent Portfolios platform in 2015 – only here the platform itself was free, used as a distribution channel for ETFs.
Fidelity fee-free funds
As price does matter a lot in the world of investments, such logic works. Regardless of geography or who the interested party is, fees are one of the key drivers for choice of investment products.
GlobalData’s surveying of independent financial advisors (IFAs) in the UK found that low fees are by far the most important factor affecting IFAs’ choice of pension funds for their clients.
And avoiding management fees is the top reason why US HNW individuals self-direct their portfolios, as per GlobalData’s 2018 Wealth Managers Survey.
Less affluent individuals are not much different, so clearly this move has broad appeal both geographically and demographically.
Fidelity’s move sent its competitors’ share prices down, with pure-play asset managers affected most.
They do not provide any additional services like brokerage services or financial advice, so cannot offer free funds as a lure.
However, the threat from low-cost passive funds is nothing new. There are already similar funds and ETFs available that hardly charge anything.
Fidelity fee-free funds
For instance, Vanguard Total Stock Market ETF has an expense ratio of 0.04%.
It is this wider trend of increasing price sensitivity, decreasing fees, and falling margins that is a threat to the asset management industry. BlackRock has been the world’s largest asset managers for years, but low-cost Vanguard has been chasing pole position and slowly closing the gap.
The industry is well aware of the situation, and in response has no choice but to innovate: look for new revenue streams (such as the expansion of securities lending), reduced cost bases (thanks to technology and automation), and new product launches to attract more investors. Ideally all three.
The arrival of new zero cost products will not change the dynamics of investor flows.
Even in a stagnant stock market with low returns, slashing fees from 0.04% to 0% would be a negligible difference for investors – not worth the effort of moving assets between funds.
The buzz generated by Fidelity’s move was perfect from a marketing perspective, but it is just another small step in a wider trend.