Investing can now be “free” – here’s how.

Fidelity

I was sitting in a room of a leading asset manager yesterday listening to the yada yada. I’d needlessly put myself under a non-disclosure agreement but it was clear that there was no real news, so I thought I’d mention the two funds that Fidelity have offered to the market since August the 3rd at a fee of 0.00%.

Whether they were in denial, in anger or in ignorance, neither of the senior executives registered the Fidelity move. The conversation moved on seamlessly, like a power point presentation that never touches the sides.

So – for these guys and for everyone else who is busy telling me how expensive it is to run funds, here is the news.

The Era of Free Investing – Bloomberg News

The move is part of an ongoing reckoning at Fidelity. The company, which built an empire on the prowess of its stock pickers, has been moving aggressively to fit into a world increasingly dominated by low-cost index products and exchange-traded funds. But it’s playing catch-up to Vanguard Group and BlackRock Inc.

So Fidelity unveiled two new index funds Wednesday to individual investors with a zero expense ratio

These zero cost funds haven’t reached Britain yet (they’re being advertised on the Fidelity Fund site at an annual cost of around 0.35%. But in this global world, it is only a matter of time before we Brits can access “free” fund management”.

Free?

Well not quite, you still have to hand over to Fidelity all the profits they can make from your money through stock-lending (and no doubt other clever tricks), but what Fidelity is offering is a “free-ride” on the stock markets into which these funds invest.

So what?

So quite a lot actually. I pay L&G about £1500 a year for them to shove my money into their tracker funds. £1500 is quite a lot for me to save if Fidelity’s funds offered me the same risk and return – hmm – must look into this.

So what for advisers?

Advisers typically charge around 1% pa to help you with your money. This has been lost in the overall baggage of fund management charges. But it’s kind a hard to lose 100bps against a fund that costs 0bps. If the car is free, the chauffeur is looking kind a pricey!

So what for the platforms?

The big idea if you are a platform manager is that you can offer funds at low cost and plenty of them. But if punters decide they want funds that are free, the idea of choosing between lots of funds that aren’t free, looks dumb!

So what for asset managers?

The shares of Fidelity’s principle rivals plummeted on the news. It was like a trade war except worse. The asset managers not only rely on a cushy price market to win new business, they rely on inertia to maintain margins on existing products. The last thing the customers of Fidelity want is for Fidelity to be poking their customers with offers of free fund management.


Can complacency prevail?

The interesting question for the UK, is can complacency be maintained amongst the millions of savers invested on platforms or in the unit linked funds offered by insurers?

The Regulators hope not. They want to see people moving their money to where the value is (for their money).

Fidelity’s move may be as welcome as a fart in the lift, to the fund managers, platform managers, insurers and advisers, but it will be met with glee at the FCA.

The question is “can anyone make any money” in a zero free world? My answer is “yes – provided they can deliver a service that is in itself transparent and delivering value for the money charged”.

The era of complacency may be drawing to an end. An era where “value for money” and “transparency” are the key determinators of success, may be upon us – sooner than we think

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Investing can now be “free” – here’s how.

  1. Adrian Boulding says:

    Henry, have you spoken to the good people st Share Action about this?

    I believe that when your fund manager lends your shares out to a hedge fund your manager forfeits their right to vote at AGMs, reconstructions etc. Because the right to vote passes to the hedgie along with the shares he’s borrowed, and of course the hedgie will vote for whatever gets him a short term buck with no regard for the your company’s long term good.

    Hope this helps

    Adrian

    Like

  2. Just for some perspective, and hoping my memory isn’t letting me down, my last institutional business, an active/passive manager in the 90s, was using a US ‘commingled’ fund (restricted to US pension plans) using full-replication index tracking, with negative cost, due sharing of stock lending fees. Yes: the 90s! I know we used both Wells Fargo and State Street but I don’t recall which this applied to – most likely State Street.

    The idea that retail can take 20 years or more to get near the cost efficiency of institutional is depressing. And some structural inefficiencies still loom large for private investors, notably the cost of transaction, custody and registration platforms. Even if the cost of an external platform can be avoided, pushing functions and costs back to the manager or adviser, this ‘utility’ service remains a disproportionately expensive element of wealth management costs. This has to be the next breakthrough, be it from scale or process automation. Perhaps both.

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