Fidelity secures ‘dozens’ of payment agreements from ETF providers

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Fidelity Investments continues to strike deals that allow it to siphon off up to 15 percent of revenue from exchange-traded funds, underscoring the enormous power of the retail brokerage as a gateway to fund distribution in the United States.

Fidelity has entered into revenue sharing agreements with “dozens” of ETF issuers, a person with knowledge of the situation told the FT, and continues to negotiate with many others. If issuers do not sign the new agreement, investors wishing to purchase their ETFs could face a surcharge of up to $100.

The decision to step up efforts to recoup some of the cost of free trading for retail investors comes even as rival Charles Schwab takes a more cautious stance. It also results demonstrations from some industry players who said the strategy could lead to higher fees on their products and a potential slowdown in product development.

“The decision to harmonize some of our fee policies comes as our level of support and service for ETFs across the industry is rapidly increasing,” a Fidelity spokesperson said in a statement. “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. »

In contrast, although Schwab also operates a major retail brokerage firm in the United States, it does not pursue such an extensive revenue-sharing program.

Charles Schwab Chairman Rick Wurster told the Financial Times that the company was monitoring Fidelity’s efforts, recognizing the substantial costs of running a large brokerage firm.

“Investment broking might be the only activity in which the company providing access and services to consumers often receives no compensation from the manufacturer,” Wurster told the FT. “We are monitoring what Fidelity is doing, as we evaluate how to best serve our customers and be compensated fairly for the services we provide.”

Revenue sharing payments for marketing services, data deals, and cost compensation from platforms like those from Fidelity and Charles Schwab are nothing new. Schwab, for example, receives revenue sharing payments related to certain “semi-transparent” active ETFs, although these represent a considerable amount. small fraction of the global market.

Fidelity’s revenue sharing program is broader, and the proposed $100 fee would wipe out a one-year period. orient yourself retail brokerages reducing fees for investors buying into the $8.6 trillion U.S. ETF industry. Fidelity and Schwab in 2019 both reduced their commissions for buying ETFs online to zero.

However, Vanguard, which ranks second behind BlackRock’s iShares franchise in the US ETF market, stands out for its avoidance of revenue sharing agreements. For example, Vanguard does not participate in the Fidelity program Fund Network program, which makes hundreds of mutual funds available without transaction fees, but imposes fees ranging from $49.95 to $100 on groups that do not pay revenue sharing fees.

Fidelity’s program is not expected to immediately lead to Vanguard investors paying steep surcharges on ETF purchases, but Vanguard’s reluctance to participate in revenue sharing is part of the reason Schwab has yet to follow suit from Fidelity.

“Our business is serving advisors, and we know Vanguard is one of the companies they value,” Wurster said.

Spokespeople for Vanguard did not respond to a request for comment. Fidelity said it does not comment on specific relationships with individual groups.

The allure of collecting income from Vanguard’s ETFs combined with the danger of alienating investors with higher commissions makes it “a bit of a poker game,” said Jeff DeMaso, the newsletter’s editor-in-chief. The Independent Vanguard Adviser.

“It’s one thing to impose these fees on smaller ETFs,” DeMaso added. “It’s another thing to impose these fees on the second player in the ETF space.”

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