Schwab is ending six-year hiatus of ETF platform fees -- possibly with a bang; ETF OneSource was a winner made obsolete by Chuck's 2019 zeroing of commissions

Charles Schwab & Co. is preparing to end its nearly seven-year hiatus on making ETF vendors pay to play on its platform by taking a cut of their revenue – or potentially charging their customers a ticket charge

The Westlake, Texas, brokerage giant and manager of $11.59 trillion is expected to introduce ETF platform fees as soon as early 2026, according to Ignites.com, which broke the story Nov. 5. 

"As our platforms grow in scale and sophistication, we are thoughtfully evaluating ETF issuer fees to ensure alignment with our focus on serving retail investors and advisors," a Schwab spokesperson told the trade journal.

Schwab is expected to ask vendors to hand over 15% of their ETF fee revenues or face a commission or “ticket charge” of about $100, if rates that competitors charge are any indication, according to analysts and industry players.

Schwab stopped charging fees to ETF sponsors in late 2019 when its own move to zero-fee commissions rendered its ETF OneSource program obsolete. See: Why ETF sponsors are ponying up big fees to get on Schwab's ETF OneSource in a bid for access to ticket-averse RIAs

The whole point of BlackRock, State Street and others paying Schwab a “program fee” of up to $250,000 for each ETF, was to become part of a short, exclusive list of ETFs that RIAs and investors could purchase without paying a stiff commission.

Once all ETFs could be purchased with zero commissions, no ETF maker wanted into ETF OneSource.

“Schwab’s decision to implement platform fees for ETFs is understandable given the industry-wide net outflows from mutual funds … ETFs clearly represent the much bigger growth opportunity,” says Loren Fox, director of research at Fuse Research, via email.

Supplementing revenue

It may also be understandable at Schwab given its previous efforts to extract ETF pay-to-platform through ETF OneSource, which were a smashing success. Assets in the program were $182 billion as of May 31, 2019, up 81% compared to the same period in 2018.

Though this new program won't apparently be able to compel massive exclusivity fees, it may make it up by applying it to a far broader swath of assets. Schwab’s third-party ETF assets also jumped 27% in the last 12 months to $2.4 trillion, according to Schwab disclosures, cited by Ignites.

Still, Schwab is not so much seeking to add revenues as replace ones subtracted by attrition, says Morningstar analyst for passive strategies, Zach Evens, in an email.

"As ETFs typically do not charge distribution fees, platforms and fund companies have been looking at other ways to supplement revenue … Platform fees and revenue-sharing agreements are ways for platforms to make up for potential shortfalls," he explains. 

ETF OneSource subscribers, at least in 2014, paid an annual asset fee up to 15%, based on the percentage of that total ETF asset purchased by customers after the ETF was added to the no transaction-fee program.

Expect declining ETF fees to be slowed by Schwab's move, says Evens. 

“The race-to-zero has already been slowing down, and platform fees could be another headwind,” he says.

Following Fidelity

Schwab declined to reveal the scale or type of fees it will introduce, but several high-profile industry analysts and executives expect its platform fee to mirror Fidelity’s 2024-introduced fee equal to 15% of their ETFs' expense ratios on an annual basis.

“I expect Schwab will follow Fidelity’s model and charge roughly 15% of the management fee, [and] they’ll likely use ticket charges [of $100] to incentivize asset managers to participate,” says Manish Khatta, CEO of TAMP and RIA outsourcer Potomac Funds in Bethesda, Md., via email.

“Mutual fund outflows and the pending ‘ETF-as-a-share-class’ structure are likely forcing Schwab’s hand to protect revenue, and frankly, I don’t blame them,” he adds.

Vanguard dilemma

Yet Schwab's introduction of ETF fees could cause major friction with the RIAs it custodies, largely because of Vanguard's historically unwavering refusal to pay for shelf-space on fund marketplaces.

Indeed, when Wurster spoke of not ruling out new ETF platform fees last year, he acknowledged that introducing ticket-charges could prove a major issue for the firm, given Vanguard's hard line on fees.

“We’re in business to serve advisers, and we know Vanguard is one of the firms they like,” Wurster told the Financial Times (FT), stating that his firm was “watching what Fidelity does,” and the impact of ETF fees on its business. See: Fidelity's new ETF fees work magic.

Schwab declined to answer if it has reached some form of compromise with Vanguard over its fees, or if it intends to levy ticket charges on advisors who frequently trade Vanguard funds.

Vanguard also declined to answer if it has reached a compromise with Schwab, or is close to reaching one with Fidelity, which states that all its platform fees hinge on contract negotiations.

Leading independent Vanguard analyst, Jeff DeMaso, editor of the Independent Vanguard Advisor says that Fidelity, in fact, balked at slapping ticket fees on Vanguard, and that Vanguard is unlikely to cave to Schwab on the same issue.

"Fidelity requires a transaction fee on Vanguard's mutual funds, but not its ETFs ... they threatened that $100 fee on smaller ETF providers, [but] I don't think they ever threatened Vanguard with it ... [and] my gut tells me that Vanguard will stick to its guns, and refuse to budge on pay-for-play," he added, in the email.

Fee pressure

Yet by keeping the fee pressure on asset managers, rather than forcing it back onto retail investors or advisors, Schwab could come out on top, according to Scott Smith, director of advice relationships at Boston consultancy, Cerulli Associates.

“The closer a firm is to the end client relationship, the more leverage it has to impose its ground rules for engagement,” he says, via email.

“If the tolls outweigh the benefits, [ETF vendors] are of course welcome to try a new route to distribution success,” he says.

“Schwab’s biggest competitive advantage is its broad reach among RIAs and [the] independent broker-dealers who use its platform,” adds Fox.

“So long as Schwab is number one in providing access to that large pool of advisors, asset managers will want to put their ETFs on the platform,” he says.

“Everyone knew Schwab would inevitably put their pricing stamp on this and they would do it to best advantage Schwab,” adds Philip Waxelbaum, principal of Masada Consulting, in an email exchange.

"The option to collect a predictable revenue stream, to offset custody costs on the road to zero [fee funds], softens the blow," he explains.

'No free lunch'

Naysayers need a reality check, says Khatta.

"Financial advisors need to move past the pre-conceived notion that custody is free. It’s capitalism. Custodians have every right to make money," he says.

“It all comes down to the fact that there is no such thing as a free lunch," adds Smith.

“Maintaining competitive margins is a constant struggle for platform providers, [so] I don’t think we should be surprised by the addition of any new revenue streams,” he says.

“Asset managers have every right to distribute through these platforms, but they should not be surprised to be asked to pay for the privilege,” he concludes.

Yet asset managers are certainly going to feel the squeeze from Schwab's latest fees.

“The cost of operating an ETF is not zero, and margins are already likely slim for many products and issuers, so it will be interesting to see how ETF issuers will handle these additional costs,” says Evens.

“The downstream expense impact will be shared through margin compression and increased internal charges,” says Waxelbaum.

“I feel for all involved, especially the low cost asset managers,” adds former Loring Ward president and CEO, Alex Potts, via email.

“They are now going to face higher costs and it is really difficult for them to raise their fees – [it] typically takes a proxy vote unless they’ve waived fees for clients,” he explains.

Bolstering margins

Custodians, as distributors of product, have also felt the squeeze, however, and ETF shelf-space fees make sense, says Fox.

“This will definitely make it a little harder for asset managers’ margins, especially for smaller firms with fewer resources to absorb additional costs … [but] distributors tend to have slimmer profit margins than asset managers," he explains.

"The ETF providers will complain but they know the long-term trend … distribution costs across the industry have been rising for years," he adds. 

Wurster, who was elevated to the executive suite and board last January, telegraphed the move while still serving as president 19 months ago. The executive, who became the firm's CEO in January, stated that Schwab was not "fairly compensated" by ETF issuers for the distribution it provides.

“Investment brokerage might be the only business where the company providing the consumer access and services often receives no compensation from the manufacturer,” Wurster told the FT, last year.

RIABiz contacted two leading ETF issuers in Pacer and ProShares. Both declined a request for comment. See: A small ETF shop thrives in Vanguard's backyard by winning advisors and investors with snappy funds -- while following a decidely anti-Vanguard strategy and charging 13 times the fees.

Minimal blowback

At the time, Fidelity Investments had just introduced its own 15% ETF platform fee.

As such, Wurster likely faces minimal industry blowback. 

Most major competitors are already charging ETF vendors without controversy. See: Charles Schwab & Co.'s vertical play to monopolize ETF market -- to be its low-cost maker, distributor and manager -- diesels ahead as ETF OneSource grows again

Vanguard Group is a potential exception. It has simply refused to buckle to fee pressure, historically. 

Neither Vanguard nor Schwab would comment about any shakeout to their relationship under the presumed change.

Morgan Stanley charges active ETF issuers a 12-basis-point support and revenue sharing fee. LPL charges separate set-up and diligence fees, and a 15% revenue sharing fee, according to Ignites.

Pershing declined to provide any details on ETF fees. Robinhood-TradePMR has yet to respond to a request for comment, despite indicating its willingness to do so, six days ago.

Inevitable move

Start-up custodian Altruist does not charge listing or revenue share fees, but its CEO, Jason Wenk says fees do have a place in the industry.

“I do understand why both would be inclined to charge as it is difficult to earn anything on most ETFs, [and] providing quality custody and clearing services is not free, of course, so the custodians should have a way to earn revenue,” he says, via email. 

“This hasn't been an issue for us, so far, as we're more of an integrated platform with many different ways advisors utilize our services, [including] custody, software, asset management … but, if an advisor used only custody and held effectively no cash, no custodian would be able to stay in business,” he explains.

“I'm not sure how this will play out long term, but it seems to me that a little transparency from the custodians wouldn't hurt.

“In other words - why not just say to the advisors … 'we need to earn X basis points, or higher, from each firm we support. We can either do this transparently with a disclosed platform fee, or we'll need to do it by charging the asset managers you utilize.

“'Free' custody … means a lot of obscure ways to generate revenue based on the highly variable usage of their platforms by advisors,” Wenk concludes.

Top dog

Schwab's imminent fee hike also comes as ETFs edge ever closer to supplanting mutual funds as the most commonly used investment vehicle, domestically and globally, according to a new Schwab study on ETF adoption, published Nov. 6.

It found that 62%, or 1,240 of 2,000 surveyed investors “can envision” holding only ETFs in the next five years. Half of those surveyed said it was a possibility.

The US ETF industry will likely become top dog somewhere between 2029 and 2031, according to an RIABiz estimate based on Morningstar and PwC data (see right).

For now, though, Mutual funds are a cash cow for Schwab. 

It earns 10-basis-points, plus transaction fees, on all mutual funds traded through its OneSource marketplace, and at least* 19-basis-points on all funds traded through its no-transaction-fee marketplace., according to Schwab disclosures. See: Seeking fresh custody revenues, Schwab Advisor Services radically expands no-transaction-fee platform.

Schwab’s new fees will augment the $750,000 annually it receives from third-party ETF issuers to access its data, reporting, and “educational events,” according to Ignites, citing Schwab disclosures.

Competitive advantage

Schwab is also far from the first firm to acknowledge the reality of dwindling mutual fund fees.

“It’s such an interesting and predictable problem … once transaction fees were cut [across the industry in 2019] ... someone had to pay the custodian for their work. It was only a matter of time,” says Potts.

“Mutual fund platform revenue is dropping precipitously; zero transaction costs hurt revenue, so where to turn? Go after asset managers.

Yet Schwab waited to see if it "was a good move,” Potts explains. 

“If advisors and clients [got] disgruntled at Fidelity,” Schwab would have found out fast.

Schwab will likely receive a secondary benefit from its introduction of ETF fees too – its own proprietary funds won't have to pay them, giving them a potential advantage on pricing.

It's “an inexpensive competitive advantage,” says Potts.

* Schwab also levies up to 45 basis points on mutual fund assets managed through its no-transaction-fee marketplace, when they previously sold through its transaction marketplace. It also charges $25,000 set-up fees for new fund listings, and up to $5,000 for further listings, according to company filings.