Fidelity puts pressure on impending revenue plan for ETF companies

(Bloomberg) — Fidelity Investments is moving to extract payments from ETF companies in exchange for listing and maintaining their products on its massive platform, stoking industry anger.

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The Boston-based investment powerhouse has already won deals with nine specialist firms after formally warning them in March that fees could be imposed directly on their ETF investors if talks fail. It is currently in active discussions with other asset managers about similar revenue sharing arrangements.

Although maintenance fees are not a new phenomenon (mutual fund companies have long paid Fidelity for the operational support it provides in listing products), they are less common among ETFs. The attempt to increase ETF-derived income threatens to increase spending in a particularly cost-conscious segment of the market.

“As active ETFs have grown, we have reached a new phase in this evolution,” said Ben Johnson, head of client solutions at Morningstar. “We are back to full circle: asset managers share a portion of their fee income with platforms for the privilege of being placed on their shelves.”

The deals being negotiated typically involve Fidelity taking 15% of the fund’s total revenue, said a person familiar with the matter who declined to comment because the conversations are private. Fidelity told at least one fund manager that it would not list its funds on the firm’s online search bar if no deal was reached, according to another person familiar with the discussions. It also imposed fees – potentially as much as $100 – on investors who placed a purchase order for a fund issued by a company that refused to make a deal, Bloomberg previously reported.

Fidelity’s efforts come as retail traders and registered investment advisers continue to shift money from mutual funds to generally cheaper and more tax-efficient ETFs. This is prompting Fidelity, which reduced trading commissions for ETFs to zero in 2019, to seek new industry revenues from products listed on its market-leading trading platform.

“We continue to work closely with asset managers, as we always have, to engage in constructive dialogue and achieve results that reflect a more consistent approach between mutual funds and ETFs,” said a Fidelity spokesperson.

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As part of the negotiations, Fidelity is asking ETF issuers to choose between giving up a portion of their already modest revenues – the average expense ratio for U.S. ETFs is 0.55% – or imposing new fees on their end investors. negotiation. Opponents say the plan would stifle innovation in the ETF space because it would make it harder for emerging companies to operate.

The investment firm’s proposed revenue-sharing deals have sparked widespread backlash in the industry. To be sure, the initial list subject to the potential $100 service fee represented less than 0.5% of the mutual funds and ETFs available to investment advisors on the Fidelity platform.

“We always knew there was a payment system for storage space in the midstream, and Fidelity reminded us that there was, but no one was happy about it,” Cinthia Murphy said , investment strategist at data provider VettaFi.

While Fidelity and Charles Schwab hold most of the market share of RIA custody assets, a new startup custodian is looking to capture market share from smaller advisory firms, in particular, and recently achieved a valuation of more than $1.5 billion. Before the ETF disruption, custodians were extracting a lot of easy money from mutual funds, said Jason Wenk, founder and CEO of Altruist.

“It’s all been a real headache, because when ETFs came about, they’re exchange-traded products, there’s no sales agreement. As long as your fund is on the stock exchange, anyone can buy it,” Wenk said. “All of a sudden, brokerage firms couldn’t go to issuers and say, ‘Hey, you have to pay us all this money to get your funds on our platform.’ It’s happening again now.

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