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Fidelity Follows Rivals to Zero-Fee Trades

In a week littered with a lot of loud news none may be bigger for investors in the long term than the move announced by Fidelity yesterday. As the custodian for our JGP clients we applaud their unique approach to client solutions. 

Fidelity Investments announced today the firm is eliminating trading commissions for stocks, ETFs and options for both retail investors and registered investment advisors that custody with the firm.

Cutting trading costs for stocks and ETFs from $4.95 to zero follows similar moves by rivals Charles Schwab and TD Ameritrade earlier this month, and firmly cements the notion that paying nothing to trade stocks and exchange traded funds is now commonplace. 

Fidelity also took the chance in its announcement to reiterate other areas where, the firm claims, its offerings beat rivals. The firm does not sweep client cash sitting idly in brokerage accounts into low-yielding depository accounts; it has since 2015 directed retail investors’ cash into a higher yielding money market account and made the same service automatic for retirement accounts earlier this year. Institutional custodial accounts don’t have the same feature, as the firm says they are giving RIAs the option to handle the cash portion of their client's account as they see fit.

The firm also pointed out in today's announcement that—unlike rivals—they won't be able to make up the lost revenue by selling order flow to exchanges.

The firm claims that seeking best buy and sell order execution leads to $17.20 in price improvement, on average, for a 1,000 share equity order, compared with an industry average of $2.89. (The number is measured by how close the trade execution comes to the national best bid or best offer price, depending on whether the investor is buying or selling). That saved Fidelity clients, across retail and the custody channel, $635 million in 2018, Fidelity says. "Unlike most competitors, Fidelity does not receive payment for equity order flow from market makers, allowing us to provide better execution quality for customers," the firm said in a statement.

Earning margins on cash spreads and selling trade order flow are major revenue drivers for brokerage firms, and are widely seen as the reason why they can afford to give away trading for free. Fidelity may be hoping that a boost to its client base—it already holds close to $7.8 trillion in client assets, with $2.8 trillion in managed assets—may offset the revenue opportunity it loses by forgoing profits off of cash margins and sold order flow. 

Scale among the online brokers and RIA custodians is increasingly a crucial competitive factor, analysts say, particularly when it comes to supporting their RIA platforms. For many custodians, the retail brokerage business has higher profit margins, and that often helps subsidize the business on the RIA side.

The fast descent to zero-fee trading commissions has swept across advisor custodial platforms in the past month. After Interactive Brokers moved to eliminate commissions on trades, Charles Schwab followed on Oct. 1, announcing it would be eliminating the $4.95 fee it charged clients per trade. TD Ameritrade followed days later, also cutting the firm's trading fee to zero. Fidelity, Charles Schwab and TD Ameritrade already provided commission-free trades to hundreds of exchange traded funds on their platforms, though less clear is how much the payment to be on the commission-free trading platform costs asset managers, and therefore by default, investors. 

“With this decision, Fidelity is taking a different path. 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,” said Kathy Murphy, president of personal investing at Fidelity, in a statement. “This is why—in addition to offering zero commissions for online trading—we will continue to automatically offer investors choice for their cash at account opening and default them into the higher yielding option, as well as provide customers with the industry-leading best trade execution that does not sacrifice customer interests. This combination is something that no other firm offers.”

Fidelity's commission changes take effect on Oct. 10 for individual investors and Nov. 4 for registered investment advisors.