In the world of investing, free is key.
Fees on many index mutual funds and exchange-traded funds have dropped to zero. Some app-based “robo-advisers” are offering no-cost investment advice. And now, online stock trading, once a cash cow for Wall Street, has gone commission-free.
Fidelity Investments said Thursday that it eliminated its $4.95 commission on online trades of stocks, ETFs, and options by retail investors. The move by the Boston-based company, whose 21.8 million client accounts rank it as the largest online broker, followed similar moves in the past month by rivals Charles Schwab, TD Ameritrade, E*Trade, and Interactive Brokers. Robinhood, an app-based broker based in Silicon Valley that offers no-commission trading, has signed up more than 6 million customers since launching at the end of 2014.
“The whole idea is bring customers in the door and get them to see what Fidelity has to offer,” said John Bonnanzio, editor of the independent Fidelity Monitor & Insight newsletter. “That’s the reality of industry these days.”
Remember, Fidelity is more than an online broker. In addition to managing $2.8 trillion in investment assets, it runs retirement and other benefit plans for companies, provides financial advice, and sells products and services to institutional traders and investment advisers.
Fidelity’s operating income hit a record $6.3 billion last year, as revenue climbed to $20.4 billion from $18.3 billion in 2017. The privately held firm doesn’t break out revenue or profit by business unit.
Demand for low costs are reshaping the investing industry.
■ Stock trading commissions have fallen dramatically since fixed commissions were eliminated in 1975, when a broker could make $100 or more on a trade, depending on the size. These days, online brokers make most of their money on banking services, including the interest earned on customer deposits, and payments they get for routing their orders to high-speed trading firms.
■ The asset-weighted expense ratio for US open-end mutual funds and ETFs averaged 0.48 percent last year, down from 0.51 percent in 2017, according to Morningstar, the second-largest year-over-year percentage decline since the Chicago-based firm began tracking the data in 2000.
■ Driving the decline in expenses: The rise of index funds and ETFs, which are designed to passively track the performance of a basket of stocks or bonds, and which carry much lower costs than actively managed funds. In August, passive funds had $4.271 trillion in assets, surpassing actively managed funds for the first time, according to Morningstar.
■ The cost of advice from financial advisers is falling, from about 2 percent of assets a few years ago to a little more than 1 percent today.
■ Even hedge funds and private equity firms, which cater to institutions and wealthy investors, have trimmed fees from the once-standard “2 and 20” — 2 percent of assets and 20 percent of investment profits — to 1.5 percent and 15 percent, or lower.
“There is a move to reduce fees, which is a good thing” for investors, Kathleen Murphy, president of Fidelity’s personal investing business, said in an interview.
The trend favors diversified companies that have multiple sources of revenue and can spread costs over a large customer base.
Murphy said Fidelity can set itself apart from other online brokers by supporting many types of customers, from millennials seeking to occasionally trade stocks, to new parents looking for help saving for college and retirement, to wealthy folks needing sophisticated financial planning.
“We want to add value,” she said, which when it comes to online trading includes offering more choices and higher rates on cash accounts. It also means getting better prices on trades by shopping around, not striking a deal with a high-speed trader.
No matter which business you’re in, it’s not good when prices go to free. Remember long-distance phone calls? Help-wanted advertising?
When Schwab announced free commissions earlier this month, its stock tumbled 10 percent. E*Trade fell 16 percent, and TD Ameritrade plunged 26 percent.
Fidelity has a big advantage: It doesn’t have public investors focused on short-term profits.
The company isn’t immune to the changes squeezing financial services, but it is well-positioned to adapt.