Fidelity Launch ‘Zero Fee’ Index Tracker Funds as Online Investment Price War Heats Up

Fidelity, the world’s fourth largest asset manager, has just announced the introduction of two new passive, index-tracking mutual funds that will carry zero charges. The rest of the company’s suite of index trackers will also see fees cut to minimal levels in a move that is further evidence of a strong trend of falling costs for retail investors.

The rise of Robinhood in the USA and fintech peers such as Freetrade available in the UK, which offer limited commission free share trading, have sparked a price war between online investment platforms and apps. That’s generally good news for those investing online in ISAs, SIPPs and other kinds of investment account.

The trend of falling fees in the retail investment sector is also apparent in the asset management sector – the companies that provide the investment products bought, sold and held via online stock broking accounts and investment platforms. U.S. rivals Charles Schwab and TD Ameritrade, which until recently also owned TD Direct Investing in the UK, now also offer index trackers whose fees, while not zero, can be considered as nominal. While those investing online in the UK still have to pay a little more, FTSE 100, 250 and All-Share tracker are available for tiny fees. The Fidelity Index UK is also the cheapest on this side of the Atlantic, with the FTSE All-Share tracker costing a fractional 0.06% a year.

While costs are important to investors, the single most important factor according to many studies, they are also not the only factor. Hargreaves Lansdown is by far the biggest investment platform in the UK by market share and towards the upper end of the price range. The quality of the platform’s usability, functionalities, customer service and perceived trustworthiness and security are also important factors and can override cost. The same can be seen in asset management. There are numerous examples of products offered by different asset managers that are essentially exactly the same but more expensive options retain greater market share. This can be down to practical considerations such as greater liquidity or simply better marketing and sales. When costs appear low to retail investors the evidence suggests they don’t put too much effort into calculating the difference that 20 years of compounded savings would make to their portfolios value.

However, despite the fact that the market has repeatedly demonstrated that slashing costs doesn’t necessarily equate to significant growth in market share, the trend in that direction is apparent and can online benefit investors. They do, however, have to realise that flagship low, or zero, charges on investment products and services need to be taken in context.

Of course, as businesses, investment platforms and asset managers still have to make money. The reality is that passive index-trackers are not the products that asset managers make their margins on. As noted by the Financial Times, Fidelity made an operating profit of $5.3 billion on revenues of $18.2 billion in 2017. The investment giant’s cuts to index trackers will cost it $47 million. It’s star actively managed fund, the Contrafund, generated $700 million in management fees.

Within this context the move has been likened to the strategy of supermarkets taking a loss, or breaking even, on core products while maintaining profits by selling the same customers organic olive oil and imported craft beers at strong margins. Or budget airlines charging a minimum for flight tickets but charging £40 for hold luggage and £4 for a 200 ml filter coffee that costs the company a few pence to make.

Regardless, the move can be considered a positive for investors in the same way we would still prefer the choice of cheap airline tickets with optional extras we are able to opt into or get by without. Passive index trackers have also become the core for a growing number of retail investors. As put by Kathleen Murphy, president of Fidelity Investments’ personal investing business:

“These are importing building blocks and we want to make it easier for people to invest and stay invested”.

New investors being attracted into Fidelity investment products through zero fee index trackers and then going on to consume other products the company makes a profit on is naturally the business logic. Regardless, the trend towards core investment products that save retail investors money compared to what they would have cost in the past can only be viewed as a positive.