How Can Fidelity Offer 0% Expense Ratio for Indexing?
How are companies like Fidelity able to offer an index fund with literally zero fees to investors? How are these asset management companies able to reduce their costs by so much?
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fidelity is laundering MEXICAN CARTEL MONEY it doesn't matter if the rate is high they are still WASHING THE MONEY
But for real haha
Alright so this messed me with big time. Did some research. Essentially a Robinhood type business. check this link out https://www.fool.com/investing/2018/08/10/fidelitys-fee-free-funds-what…
So basically, they just use these zero-cost index fund as a means to lure you in to the business and hope that you buy their other commission-requiring products, and they also earn interest off of the uninvested cash. Makes sense. +1
But how do other companies like Blackrock compete with this?
Well E-Trade, Charles Schwab, TDSecurities didn't bother competing with robinhood. Looks like other brokerages are taking the same approach, Vanguard exec even advised the public to watch out for the catch in Fidelity's 0 cost funds.
Even ran across an article that said Vanguard has 0 plans of rivaling Fidelity's 0 fee funds. However that might be a bit false since Vanguard did introduce a bunch of expense ratio cuts across several different funds.
They make money off securities lending too
I'm doing a research paper for school and that's why I'm on here asking for advice - how do you think other asset management firms like Blackrock could remain competitive in an atmmosphere of slashing fees to literally zero?
They lend securities too More esoteric indexes are significantly above 0bps fees
Yep that was my guess. And maybe selling some order flow.
bump
What else do you want to know? The initial question was answered: they make up for it via cross-selling and sec lending.
Fidelity has made it huge as a custodian. They are barely treading water in the asset management game. They are using the "0" funds to throw in the towel in AM and just blow the competition out of the water for custody.
What’s your view on research analyst tracks at large shops like Fidelity or Wellington? Potentially still a comfortable career because the platforms’ scale protects them in this environment?
As others have said: securities lending and cross selling, but they also make money off payment for order flow.
I'm not an expert in this space (by any stretch), but I'd assume it's just a loss leader. No different than bananas at Walmart.
You asked in the thread how Blackrock will compete - I'd assume that they have a very different customer base. I'm sure there's some overlap, but I'd doubt Blackrock will enter a race to the bottom.
blackrock doesn't try to compete, they don't go direct to investors, meaning you can't go to blackrock.com and open an account.
I can tell you no PWM'er or big institutional firm I've seen gives a flying fuck about the difference between 0 and 4bps.
I'll stay with iShares/vanguard
My experience is different in 'bulk beta' equities. I know of several $100B+ institutions that expect quotes to go to the tenth or hundredth of a basis point. If you think the retail AM space is tough, try waving around a $20B mandate and asking for quotes for undifferentiated products.
On top of what others have said regarding baiting you in, Financial Services firms make a killing as the Plan Administrator for a company's retirement plan. Fidelity has typically been involved with for-profit business, however they've made a big push in the non-profit (higher education, government, etc.) space during the last 5 years. TIAA used to be the only player in the space, but they've been bleeding clients as of late. Everyone is trying to penetrate and establish themselves in the Heath care market. Plan Administration isn't something many people think/know about, but it's a very lucrative part of the Financial Services world.
Is Vanguard or Blackrock doing this also?
Vanguard is to an extent. I think they're focusing on smaller companies, as well as niche markets in order to expand. I haven't heard much about them winning SRK (sole record keeper) contracts with larger non-profits. I'm unsure about Blackrock. I know plans have many of their funds but I don't know if Plan Administration is part of their "2025" strategy.
Nobody here answered the initial question which was how does an AM like Fidelity make money on a fund when the expense ratio is 0. The answer is, there are several other ways besides fees to make money ... one is payment for order flow and another is securities lending (lending out some shares to parties which need them, then profiting by investing the collateral).
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