Fidelity Investments heightened pressure on other money managers to rethink pricing on Wednesday, when the firm announced it was reducing fees on some existing index mutual funds and, more dramatically, eliminating management fees entirely for two new ones.
Due to launch Aug. 3, the Fidelity ZERO Total Market Index Fund (FZROX) and Fidelity ZERO International Index Fund (FZILX) will both have no investment minimum and an expense ratio of zero percent.
The money manager with over $7 trillion in client assets will be launching a single share class of each stock fund to retail investors. In addition to the new funds, it’s consolidating share classes and reducing the fees of 21 stock and bond mutual funds available to financial advisors, who shop on behalf of clients for investments offering passive, broad market exposure.
Tim Welsh, CEO and founder of Nexus Strategy, a consulting firm focused on the wealth management industry, said the new funds are “more than just a retail story” and noted that Fidelity made the announcement on the heels of a move by Vanguard, who recently announced a dramatic expansion in the number of commission-free ETFs offered on its platform.
Asset managers have started competing when it comes to strategy, rather than price, Welsh said. If a firm tries to compete on price “you’ll lose, it’s already zero,” Welsh said.
Observers and media have dubbed the lowering of fees as a “race to zero” but money managers aren’t in a hurry to voluntarily surrender fee revenue unless they have to. Like the lowering of commissions charged by discount brokerages over the years, asset managers have not yet been engaging in similar tit-for-tat changes to prices. But the move by the Boston-based brokerage and asset manager suggests that’s changing.
“It’s a shot across the bow at Vanguard,” Greg O’Gara, a senior research analyst for Aite Group’s Wealth Management practice, said about Fidelity’s price changes.
The underlying components of Fidelity’s two new zero-fee mutual funds are also of interest, O’Gara said. The FZROX portfolio is similar to what is already available in the Vanguard Total Stock Market Index Fund (VTSMX) and the Schwab Total Stock Market Index Fund (SWTSX), which track the broad domestic market and have net expense ratios of 0.14 and 0.03 percent, respectively.
Likewise, FZILX is considerably less expensive than the comparable Vanguard FTSE All World, Ex-U.S. Index Fund (VFWIX) and the Schwab International Index Fund (SWISX), with expense ratios of 0.23 and 0.06 percent, respectively. O’Gara said that the decision seemed more experimental on Fidelity’s part.
O’Gara said Fidelity has the breadth to experiment. Fees aside, managers make money by lending securities, among other ways. O’Gara said he thinks the new zero-fee mutual funds are intended to attract advisors and investors with whom the word “zero” will resonate more so than an announcement about basis-points reductions.
The the new funds also give Fidelity a “captive audience” to sell other products and services, O’Gara said.