Fidelity makes fractional share trading available to financial advisors

Fidelity Institutional is finally making fractional share trading available to wealth management firms.

The firm first introduced the functionality — which allows investors to buy as little as 0.001 of an equity or ETF as long as the value of the order is $1 — to retail customers in early 2020, but has kept quiet on when it would be available to advisors in its custody and clearing business. Now the firm is rolling out fractional share trading to its advisor technology suite, Wealthscape.

Fractional share trading has been key to the mainstream appeal of retail trading apps like Robinhood by letting investors put small amounts of money towards popular, yet expensive, stocks like Google parent company Alphabet or Amazon. Though not everyone agrees that fractional share trading is a good idea, bringing it to the institutional business can make it easier for small investors to access professional advice, said Ryan Plotner, Fidelity Institutional’s head of transaction and banking solutions.

“Offering fractional share trading to advisors enables them to offer proprietary [investing] strategies to a broader set of clients,” Plotner said. It can also help advisors customize client portfolios and handle certain tactical situations, such as reducing concentrated, low-basis positions in similar stocks, he added.

“As the technology and the capability has become more present in the marketplace, advisors have seen it and have been asking for it as well,” Plotner said.

The move by Fidelity demonstrates the growing demand for portfolio customization among financial advisors, according to Scott Smith, director of advice relationships at research firm Cerulli Associates.

“This step will allow advisors to more precisely match their targeted allocations without any tracking error built in by operational limitations,” Smith said in an email. “I anticipate other platforms of scale who have yet to offer this option will need to play the role of fast followers or face increasing inquiries from their platform users.”

BNY Mellon Pershing, Apex Clearing, Interactive Brokers and Folio Institutional (which was acquired by Goldman Sachs) already offer fractional share trading to RIAs. While others execute fractional trades at the end of the trading day or wait for multiple orders to add up to full shares, Fidelity will execute the trades in real-time during market hours so advisors and clients always know the share price, Plotner said.

Allowing investors to hold pieces of stock is considered key to making direct indexing — the strategy of mimicking the performance of an index by purchasing the underlying securities instead of an ETF — widely accessible to financial advisors. WIthout fractional shares, the tax optimization and portfolio customization benefits have largely been reserved for the ultra-wealthy.

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Fidelity has plans to eventually incorporate fractional share trading into modeling and rebalancing capabilities, but the firm isn’t yet saying anything specific about direct indexing, Plotner said.