There’s a useful rule in finance: when something is advertised as free, ask who’s paying.
For years, investors were told that trading had been “democratised” and commissions had disappeared. The small investor, apparently, had won.
But zero-commission trading was never free. It was subsidised, bundled, cross-sold or recovered elsewhere. Now one of America’s largest investment platforms has made the arrangement harder to ignore.
From 1 June, Fidelity began charging investors up to $100 when they buy certain ETFs from issuers that have not agreed to pay Fidelity for access to its platform.
The fee is remarkable in itself, but the more revealing fact is that when an investment platform becomes large enough, “customer first” can slowly become “platform first”. While the language stays the same, the economics do not.
The new toll booth
ETF issuers were told they could either pay Fidelity a direct fee or their investors would face a service charge when buying their funds. That charge is roughly 5% of the trade, capped at $100.
Large asset managers can often absorb this sort of cost, but smaller, independent fund providers can’t. And so more than 120 ETFs have reportedly ended up on Fidelity’s service-fee list, including products ordinary investors may well want to own.
Put bluntly, if you invest $500 into one of those funds, a $100 charge becomes an instant 20% loss before the market has moved at all.
It’s a clear case of the old economics of “free” investing being dragged into daylight. Platforms control the customer relationship, fund managers want access to those customers and, somewhere in the middle, money changes hands. The customer may not always see the bill, but they usually pay it.
Innovation pays the price
The real danger isn’t simply that investors are being charged more – it’s that access to investors is becoming something to be bought.
A giant asset manager can pay for shelf space and spread the cost across a vast business. The same isn’t true of a founder running one innovative ETF. They either pay the toll and raise costs or refuse and watch investors face a punitive charge at checkout.
That undermines much of what the ETF revolution was meant to achieve. ETFs were supposed to lower costs, widen choice and allow better ideas to reach ordinary investors. A platform toll reverses that logic by rewarding the product with the deepest pockets as opposed to the best one.
There’s a painful irony here in that Fidelity built much of its reputation as a champion of the everyday investor, helping drive down visible costs and pioneering zero-fee index funds. Yet when a firm charges customers $100 to buy a product its commercial team has not monetised, “customer first” starts to sound less like a principle and more like a slogan.
Britain should not feel smug
British investors may be tempted to see this as an American problem, but the same forces exist in the UK. They just wear different clothes.
The Retail Distribution Review rightly banned hidden commissions on retail investment products. However, it didn’t abolish the economics of distribution, moving the costs into the open instead – platform fees, custody fees, dealing charges and exit fees.
A UK investor paying 0.25% to 0.45% a year may not feel as though they’re being charged very much. But over decades, those small annual percentages compound into a large transfer of wealth from customer to platform.
The lesson travels well. When a platform’s business model depends on standing between you and your money, the tolls tend to multiply. Scale does not protect customers from extraction but what makes extraction possible.
Now, I have an obvious interest in this debate. I run Prosper, a UK investment platform built on a different premise.
At Prosper, we charge no platform fees, trading fees, transfer or exit fees. We also refund the fund management charges on more than 30 widely held funds and ETFs from managers including BlackRock, Vanguard and Fidelity.
No issuer pays us for shelf space and no fund is pushed forward because it pays us a kickback. Instead, we retain interest on cash left uninvested in investment products and any cash held in your Prosper Wallet.
Fees are not just irritating – they decide how much of your return you keep and which financial ideas survive.
Investors shouldn't have to pay a toll simply because someone else owns the road.
This article is for informational purposes only and does not constitute personal financial advice. If you are unsure whether an investment is right for you, please seek financial advice.
Capital at risk. The value of your investments can go down as well as up and you may get back less than you invest. Uninvested cash doesn’t earn interest.