Fidelity’s commission-free. What's next?

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In a highly-anticipated move that is expected to have long reaching consequences for both the retail and advisory channels, Fidelity says it will also drop commissions for online trades, about a week after its competitors.

The low-cost brokerage announced zero-commissions for all online U.S. stocks, ETFs and option trades for retail investors and will extend the pricing to RIAs in its institutional channel in November.

“With this decision, Fidelity is taking a different path,” Kathleen Murphy, Fidelity’s president of personal investing, said in a statement. “We are providing customers unmatched value while challenging industry practices that appear to give value in one place when they are actually having customers pay in other ways.”

Addressing industry concerns about lesser known revenue streams, Fidelity says it will direct cash into a money market fund instead of utilizing cash sweeps that would earn interest for the firm, according to a release. The brokerage also says it won’t sell trading orders to high-frequency traders, another common industry practice.

The move to eliminate commissions comes after competitors including Schwab and TD Ameritrade made similar announcements last week. The commission-free rates for all firms will be available to clients using web and mobile channels.

Analysts and advisors expected Fidelity to follow suit.

“Free will soon become the expectation for online stock and ETF trades,” says Jennifer Butler, director of research at Corporate Insight, adding that Fidelity likely has the scale to weather revenues dropped on commissions. “Those that don’t go to zero could be putting themselves at a competitive disadvantage.”

While Fidelity declined to answer additional questions about expected revenue losses, its largest competitors projected worrisome outlooks last week. Schwab expects an approximate $100 million loss in quarterly revenue, while TD Ameritrade anticipates up to a $240 million loss per quarter. E-Trade estimated losses in revenue would have been approximately $75 million in the second quarter.

“[Fidelity is] known to be very aggressive in their pricing strategy,” Wei Ke, a managing partner at pricing consultancy Simon-Kucher & Partners, told Financial Planning last week.

About 36% — or almost $2 billion — of TD Ameritrade’s annual revenue comes from ETF commissions and mutual fund transaction fees, according to its 2018 earnings report.

“Fidelity should be in good position to handle the loss in revenue,” says Eric Sandrib, analyst at Aite Group. While Fidelity was all but destined to go to zero to keep up, they likely still view this as an opportunity to gain clients, he says.

“It will be interesting to see if any firms emerge from this with above-average client growth,” Sandrib says. “They have the advertising breadth to get the word out to retail investors and perhaps new clients will come onboard.”

The new pricing model created a credit negative for the retail brokerage industry, according to a Fitch Ratings report. Brokerages may be pressured to emphasize other sources of revenue and will likely face further industry consolidation, according to the report.

“The key to success in this new commission-free environment will be will be persuading a significant share of self-directed traders to move into fee-based accounts,” Butler says.

For advisors, zero commissions may mean more for smaller accounts, says advisor Kirk Kreikemeier, who runs RIA Pebble Valley Wealth Management, which custodies with Schwab and TD Ameritrade.

“For my smaller account list, I was intentionally using the [commission-free] list,” he says, noting that he didn’t want to “chew up” their investment dollars.

Still, it could be meaningful for larger clients as well.

“I have a client with $10 million net worth and he didn’t want to pay $6 commissions,” Kreikemeier says.

As commissions drop to zero at brokerages, another question remains: When will the same happen for mutual fund platforms?

“Mutual fund commissions have been silent and quiet and pretty damn high, to be honest, relative to ETFs,” Kreikemeier says.

There are over 30 million investors that use Fidelity with a total $6.7 trillion customer assets. Demand for managed accounts is growing, estimated to grow to $8.1 trillion in 2020 up from from $5.7 trillion of AUM in 2017.

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