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At the same time, the Boston giant slashes commissions on 99% of the other mutual funds and, analysts say, may have declared war on Vanguard and Schwab in one move
December 5, 2013 — 8:18 PM UTC by Lisa Shidler
Brooke’s Note: It’s the opposite of a roach motel for people buying DFA and Vanguard funds at Fidelity. It’s easy to check out but harder to check in. It may have an un-merry aspect to it this holiday season at Vanguard, DFA and Schwab, analysts say.
Fidelity Investments is slashing its commissions on mutual fund trades — with the notable exceptions.
The Boston-based giant sent a “Fidelity Flash” e-mail to RIAs this week informing them that starting Jan. 1, 2014 the majority of all buy and sell trades will be reduced from $40 to $30. So, a “round-trip” would go down from $80 to $60 — a 25% reduction for funds on Fidelity Institutional’s FundsNetwork platform.
The fee changes also apply to the retail channel.
Yet in an eye-opening move, Fidelity is jacking up the trade fees it charges on mutual funds of rival Vanguard Group of Malvern. Pa. and a small handful of other companies. The biggest disparity will be purchase commissions, which will be $30 for most funds but 66% more, or $50 for funds from CGM Funds of Boston; Dimensional Fund Advisors of Austin, Texas; San Francisco-based Dodge & Cox Funds; and New York-based Sequoia Funds. See: Dimensional Fund Advisors still has low RIA acceptance rate and stunning growth.
But the sell-price for these five fund companies is being reduced to just $30. This means the “round-trip” for funds produced by these fund companies will cost $80 — which is only $20 more than a new “round-trip” exchange for the other funds. The previous round-trip fee was $80.
Why single out Vanguard, DFA and the three others
The commission hikes to these five companies are a reasonable leveling of the playing field, according Erica Birke, spokeswoman for Fidelity. These companies don’t pay traditional shareholder fees and Fidelity is performing many services for these mutual fund companies.
“The reason we’re adding this charge is to address some disparity among the funds on the FundsNetwork platform,” she says . “Unlike 99% of the fund families on the platform, these firms noted are not compensating Fidelity for administrative and shareholder services that Fidelity performs on their behalf. These services include but are not limited to, processing trades, dividends, answering questions, delivering required documents, supporting client inquiries and problem resolution, web and trading infrastructures, compliance and reporting to the fund.”
Birke adds that Fidelity is 100% open architecture in the sense that Fidelity FundsNetwork is the largest mutual fund platform in the industry with over 20,000 funds from more than 700 fund companies.
No pay to play
Industry leaders point out that the fund companies where Fidelity is raising the price don’t charge 12(b)-1 fees, hence they don’t participate in the highly lucrative fee-sharing arrangement, about 40 basis points, that are part of no-transaction-fee programs See: Schwab and T. Rowe Price finally strike a OneSource deal with help from an ex-Fido exec.
DFA and Vanguard recorded the largest net inflows of all mutual fund companies for the first three quarters ended Sept. 30 this year. DFA lured $16.7 billion, the majority of which came from RIAs.
For now, the affected fund companies are speechless about the new fees that their clients will pay. A Dodge & Cox spokesperson declined to comment and a DFA spokesperson also declined to comment. A representative at CGM directed questions to Fidelity. A representatives at Sequoia did not return messages seeking comment. See: Dimensional Fund Advisors still has low RIA acceptance rate and stunning growth.
Fund-researcher Chicago-based Morningstar, Inc., too, said it had nothing to say on this matter.
Time to shop around
Alex Potts, chief executive of Loring Ward, a DFA TAMP with about $10 billion of AUM, says the change at Fidelity doesn’t appear to affect his firm. He hinted, however, that he’s open to shopping around to other custodians to find the best deal. See: Loring Ward tells a focus group to let loose on advisors — and it does.
“It doesn’t really impact Loring Ward’s value proposition. We’ll keep looking to find 'win-wins’ for the advisors and their clients. I’m not sure how much Fidelity is raising prices, but the good news is there are many custodians willing to accept the business at a fair price,” he adds.
Can’t play nice
Marty Bicknell, chief executive of Mariner Wealth Advisors, which manages $26.5 billion of assets, including $8.3 billion of RIA wealth management assets, expressed some shock at the price changes but says at first blush it appears that the changes will have a positive effect at his firm.
“That’s going to have a positive impact on 99% of funds so it has to have a positive effect on my firm and that’s got to have a positive effect on my clients as well.” Mariner does not invest in DFA or Dodge & Cox funds and minimally in Vanguard funds.
Jim Lowell, chief investment officer of Adviser Investments and editor of Fidelity Investors agrees that it’s a net positive for RIAs —pointing out that San Francisco-based Dodge & Cox is an excellent company but a smaller fund-shop — and CGM is also a smaller firm as well. He also says that DFA has a very different sales and customer service model than Fidelity.
The real issue seems to be an ongoing spat between Fidelity and Vanguard, Lowell says.
“The big news here is that Fidelity and Vanguard still can’t seem to figure out a way to play nice in our multi-trillion dollar sandbox. It is our money. Now Vanguard may say it’s Fidelity’s fault, and vice versa. In terms of business won or lost they both likely feel like they’ve already figured out who their customers are and how to attract their assets to their products,” Lowell says.
Vanguard spokeswoman Emily White declined to comment initially but later emailed this explanatory comment: “Vanguard does not pay for distribution—that is, we do not pay platforms or advisors to sell our mutual funds or ETFs.” See: John Bogle tells the Morningstar crowd just why Vanguard Group has a 'problem’ — and it starts with his dogged criticism.
Lowell says in an ideal world the two giant rivals would work together better. “Think of a borderless world where you could own a Vanguard index fund complemented by a Fidelity actively managed fund in the same asset class, capitalization range, region or sector — for less cost. That may be hard to find — but it would be the best of both worlds combined.”
Even though it appears Fidelity is justified in its new pricing scheme, it does look a bit funny that it is charging RIAs extra to purchase funds from some of its biggest competitors, says Burt Greenwald, of B.J. Greenwald Associates in Philadelphia.
“It certainly looks as if they’re trying to deflect business from their competitors, but that would be an unusual stance for Fidelity,” he says. “It suggests the ability to get marketing support fees from other funds is still a viable source of revenue for them.”
But Greenwald thinks that the real reason Fidelity slashed its prices is to pressure the giant leader in the RIA arena. Schwab Advisor Services
“I suspect this is a calculated move to lower fees on nearly all trades suggest they want to send a message to Schwab. Schwab has had the lead historically in working with independent RIAs and the fact that Fidelity is cutting fees suggests they’re trying to compete head-to-head with Schwab. At the same time, they don’t want to cut off their own neck by making concessions with groups that aren’t cooperating. I think it’s as simple as that.” See: Schwab to pump millions of dollars into promoting RIAs as a channel.
Big custody responds
Schwab spokesman Greg Gable says that his firm has a standard fee of $49.95 for both buys and sells on transaction fee funds. He did add that these fees are subject to possible discounts depending on how a specific client’s overall relationship pricing is structured.
At “Pershing Advisor Solutions,“http://www.riabiz.com/d/143050, Paul Patella, vice president of public relations, declined to list his firm’s specific transaction fees but did say: “We believe our fees are competitive and we are constantly evaluating our pricing model.”
TD Ameritrade spokesman Joseph Giannone says his firm charges as little as $24 per mutual fund trade for end-clients that have $500,000 and/or who participate in the firm’s electronic statement or trade confirmation delivery.
He adds in an e-mail: “We charge $31 a trade if the end-client does not meet these criteria — they have less than $500,000 and do not participate with electronic statement/trade confirmation delivery.”
Giannone says his company has “no plans” to change its pricing on mutual funds but did not rule out the possibility.
The potential for a price war among the big custodians and mutual funds is certainly interesting to watch, Potts says.
“At some point the economics must work out for all involved or advisors will stop sending business to a respective custodian. Meaning, Fidelity, Schwab, TD, Pershing all do good work and are in fiercely competitive markets. The mutual funds [shareholders] are getting a “win” because their funds’ transfer agency costs are coming down because of the recordkeeping of the custodians. However, the custodians are getting a “win” by getting paid in the millions of dollars to transact trades — mainly all electronic and very efficiently. As well, the custodians will earn money on shareholder accounts in money markets. At some point, you’d like to see trading costs coming down, not up, given the efficiency of trading mechanisms at the custodians. This has generally held true,” Potts says.
Potts also doesn’t believe that the fund companies are getting a “free ride.”
“Ultimately, by a fund shareholder using a custodian, rather than going to a fund family, the fund shareholder is paying for trading, money market,” Potts says. “You can argue the shareholder is paying slightly less to a transfer agency, but actually paying more costs for the convenience of using a custodian.”
Potts still isn’t sure whether this change will have a dramatic impact on buying habbits of RIAs.
. “Does the change in fee make it unappealing to RIAs and their clients? Possibly,” Potts says. “However, all advisors have a fiduciary obligation to find the best place for our clients to transact and provide their value to clients in the most effective and cost efficient way possible.”
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