Fidelity quietly imposes an ETF 60-day fee that makes RIAs with trading strategies seethe

Mike Durbin says that Fidelity still has net trading costs on iShares that are pretty unbeatable

Friday 3.15.13 by Lisa Shidler

Brooke’s Note: Have you seen the MetLife advertisement for life insurance where the man in the suit says that people can get coverage for about $14 a month. Animated peanuts characters in the room, especially Lucy, say that they want the price reduced to five cents. The suit looks uncomfortable and says: “Everything can’t be five cents.” Something tells me that Fidelity and others who distribute ETFs would like to blurt out a similar line right now. So much of what they’re providing in the ETF realm is free or dirt cheap. A fee is an outrage. Maybe it is? But not everything, it’s true, can be five cents.

Fidelity Investments is taking some knocks because the firm’s commission-free ETF imposes a fee for those sold within 60 days of purchase. See: How Fidelity is locking arms with BlackRock and appealing to RIAs to fend off a Schwab ETF threat.

The Boston-based giant is also receiving complaints from advisors who loaded up on ETFs on the old no-fee platform that will no longer trade commission-free.

These concerns were sparked when Fidelity announced Wednesday that it would be offering 65 iShares — with BlackRock — commission- free, a leap from 30 funds under the old agreement. See: Fidelity and BlackRock are cooking up a (de facto) de novo ETF company deep in the Rockies.

The thorn in the rose for RIAs is a new $7.95 sell-side commission fee for trades sold within 60 days. That fee goes to $12.50 for manual trades. Previously, Fidelity hadn’t charged any fees for the 30 commission-free ETFs.

Frequent traders

Fidelity’s head of RIA custody, Mike Durbin, says the fee was included because there was a small group of investors who were actively trading the ETFs and it was costly. He feels the majority of RIAs use these products for long-term investing.

“We think having the 60-day fees positions these for long-term,” Durbin says. “If you want to trade a lot, you are still only paying $7.95 and that’s $4 a trade. We think that rate is still great compared to competitors.”

Schwab does not have any such fees on its commission-free ETFs, but others in the industry, such as TD Ameritrade, do carry similar fees. See: Schwab makes play for ETF-distribution domination but not without risks.

Tactical error?

But Matt Tuttle, principal of Tuttle Tactical Management LLC, is frustrated by the added fee.

“I have not used Schwab’s platform. We made a strategic decision awhile back to partner with Fidelity but unless Fidelity changes its mind we might be moving everything.”

Tuttle is based in Stamford, Conn. His RIA has $115 million AUM, mostly in ETFs, with Fidelity,

Tuttle says many of his clients are not high-net-worth and he manages assets for clients with as low as $100 — just the type of clients who are quite sensitive to fees. Even a $7.95 would be frustrating to his clients, he feels.

Mike Durbin: We think having the 60-day fees positions these for long-term.
Mike Durbin: We think having the
60-day fees positions these for long-term.

“We’re not one of those RIAs who is snobby and says we’ll only work with million-dollar clients…. If I have to charge them $7.95 every time I sell an ETF, it won’t work.”

He also suspects that RIAs who are heavily invested in ETFs will also have a similar reaction..

“They appear to make their program better but when you look at it they have made it much worse. Many RIAs who use ETFs are beginning to use them tactically, for them these redemption fees could be a killer,” Tuttle says.

Scott Freeze, president of Street One Financial, says the fee has been a cause of huge complaint by advisors. His firm buys ETFs for RIAs. Street One is a firm that helps RIAs trade ETFs more effectively.

“Advisors feel like this fee is total B.S.,” he says. “It just leaves a bad taste in the mouth because now you’re telling people you have to hold something for 2 months. What if something happens in the market and you need to get out of that position, but then your client is going to get hit with these extra fees.

No outcry

Durbin says so far his firm hasn’t received an outcry from RIAs about this new fee. He says the decision was made simply because it became too expensive for the company to continue to offer the products with no fees at all, given some of the frequent traders.

“We had successful three years but there were a handful of advisors that established pretty significant positions and were very active traders. There’s nothing wrong with that, but it was an expensive platform for us to support and we have real costs on every platform and every trade,” Durbin says. “We thought it was prudent to put in that 60-day window. We’re not hearing outcry from advisors. By and large, most are holding the shares more than 60 days.”

TD’s penalty chug

TD Ameritrade also levies a charge for investors who sell commission-free ETFs within 30 days, says spokeswoman Christina Goethe.

At TD Ameritrade, the company also has a commission-free ETF list. At TD, if investors liquidate positions within 30 days, they are charged $19.99, essentially what they would have paid if they had purchased the ETF off of the commission of the commission-free list. TD Ameritrade offers 101 commission-free ETFs from nine companies including options from iShares, Vanguard, Barclays, PowerShares and WisdomTree. That’s out of approximately 1,500 ETFs TD offers. See: TD Ameritrade beats Schwab to the punch with ETF option for retirement plans.

“TD Ameritrade’s commission-free ETF program is intended for long-term investing. The funds were selected with that premise in mind,” Goethe says. “I want to emphasize that it’s very important to us that the list is objective; therefore TD Ameritrade receives no special compensation or management fees from any of the ETF providers for being included on the list and the funds are independently selected.”

While many custodians are offering commission-free ETFs, Pershing Advisor Solutions has purposefully chosen not to make this offering available.

“Pershing Advisor Solutions serves RIAs who support sophisticated clients and we do not want to dictate to what ETFs they use. Our strategy around all investment solutions, including ETFs, is to offer flexibility, open architecture and choice rather than a mass market approach,” says Sandy Motusesky, director of financial solutions at Pershing. See: Pershing clarifies how it’s the un-Schwab and a far-flung crowd pours in to South Florida.

Fidelity partners with iShares

Fidelity’s only partnership is through BlackRock’s iShares and the company is banking its ETFs hopes on iShares and is also working with them to help produce ETFs. See: How BlackRock plans to grow iShares using advisors as one key.

As part of Fidelity’s revamped deal with iShares, the company took the 30 choices up to 65, but in the process Fidelity eliminated a group of 10 funds that had been part of the 30.

RIAs maintain that among those 10 cut from the list were some very popular iShares including those with the ticker symbols IWM, EFA and EEM.

Real money

Tuttle says he was disappointed to see certain options taken off the table because they were popular accounts with active trading making the costs less. He points out that IWM has about $3 billion worth of trading in any given day and with those types of margins he was able to save money compared to funds, which aren’t traded as often because the spreads are wider.

“We’re real active in that ETF and when I’m trading, I’m trading about 10 million blocks. Now, they’re getting rid of IWM and replacing it with IJF which trades about $65 million a day. That means my $10 million book order could cost 5 more cents more a share and that’s real money.”

He says he’ll trade more than 100,000 shares of ETFs in any given day and many of the orders are about $10 million.

“I don’t know why they made these changes, but to me this whole move is really aimed at retail investors. If I’m trading 100 shares and hold on to them forever, I’ll think this is awesome, but for RIAs this is a disaster,” Tuttle says. “It seems someone in retail made this decision.”

No overlap

According to Durbin, one of the advantages of iShares ETFs is that they have such active trading that the costs can actually be less than competitors. Durbin says iShares have a much higher trading volume giving them tighter spreads that could save investors 1 to 3 cents — a meaningful amount in large trades.

On Thursday, Durbin confirmed that 10 funds were removed from the original list, mostly so the company could have the best list of 65 funds. “We started with a clean sheet of paper and wanted to have a wide range of assets classes with competitive management fees,” Durbin says.

Durbin says Fidelity wanted to eliminate overlap of funds while having the best options available for advisors and retail investors alike. He said the company was seeking the best choices.

“We wanted to choose a solid core with S&P anchor choices and round out the asset classes,” he says. “We wanted to avoid redundancies.”

Mike Durbin

Fidelity | BlackRock | iShares | TD Ameritrade | Pershing