Fidelity Investments is flexing its muscles in efforts to extract payments from ETF firms in exchange for listing and maintaining their products on its system, stoking industry ire.
The Boston-based investment powerhouse has already won agreements with nine boutique firms after formally warning them in March that charges could be imposed directly on their ETF investors if discussions break down. It's now in active discussions with other asset managers on similar revenue-sharing agreements.
Although maintenance fees aren't a new phenomenon — mutual fund firms have long paid Fidelity for the operational support it provides by listing products — they're less commonplace among ETFs. The bid to eke out ETF-derived revenue threatens to add on expenses in a particularly cost-conscious corner of the market.
"As active ETFs have grown, we've reached a new phase of this evolution," said Ben Johnson, head of client solutions at Morningstar. "We've come full circle back to asset managers sharing a portion of their fee revenues with platforms for the privilege of being placed on their shelves."
The arrangements being negotiated generally involve Fidelity taking 15% of total fund revenue, said a person familiar with the matter who declined to comment because the conversations are private. Fidelity told at least one money manager that it won't populate its funds on the firm's online search bar if no deal is reached, according to another person familiar with the discussions. It has also floated a charge — possibly as much as $100 — for investors who placed a buy order for a fund issued from a firm that declined to forge an agreement, Bloomberg previously reported.
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Fidelity's efforts come as retail traders and registered investment advisers continue to shift money out of mutual funds and into generally cheaper, more tax-efficient ETFs. That's spurring Fidelity, which slashed trading commissions to zero for ETFs in 2019, to seek out fresh industry revenues on products listed on its market-leading trading platform.
"We continue to work closely with asset managers, as we've always done, to engage in constructive dialog and reach outcomes that reflect a more consistent approach across mutual funds and ETFs," said a Fidelity spokesperson.
With the negotiations, Fidelity is asking ETF issuers to choose between giving away party of their already thin revenue — the average expense ratio for U.S. ETFs is 0.55% — or hit their end investors with a new trading charge. Opponents say the plan will stifle innovation in the ETF space as it makes it more difficult for new firms to operate.
The investment firm's proposed revenue-sharing agreements have sparked broad industry backlash. To be sure, the initial list subject to the potential $100 servicing charge makes up less than 0.5% of mutual funds and ETFs available to investment advisers on Fidelity.
"We've always known that there is a pay-to-play in place for shelf space in the intermediary space, and Fidelity reminded us that is the case, but no one was happy about it," said Cinthia Murphy, an investment strategist at the data provider VettaFi.
Although Fidelity and Charles Schwab hold most of the market share for RIA custody assets, a new startup custodian is seeking to grab market share from smaller advisory firms, in particular, and recently achieved a valuation of more than $1.5 billion. Custodians used to extract a lot of easy money from mutual funds before the ETF disruption, said Jason Wenk, founder and CEO of Altruist.
"That all got like a huge wrench thrown in it because when ETFs came about, these are exchange-traded products, there's no selling agreements. As long as your fund is on an exchange, anybody can buy it," Wenk said. "All of the sudden, the brokerage firms couldn't go to the issuers and tell them, 'Hey, you have to pay us all this money to have your funds on our platform.' That's now kind of happening again."
