Last week was a seminal moment in financial services. Client fees have been on a downward trend for passive funds for some time, but last week Fidelity in the United States introduced zero cost funds for retail investors with the Fidelity Zero Total Market Index (FZROX) and Fidelity Zero International Index (FZILX). Almost as impressively, these funds have no minimum investment and started trading immediately last Friday.
So how is this possible and what are the implications? It is possible because in the U.S. Fidelity is a big player in the retirement plan market, and they can cross subsidise their fees from other funds and brokerage services, such as stock lending.
As to implications, for Charles Schwab another major U.S. player there will undoubtedly be a response, but for players such as Vanguard and Blackrock where indexing is core to their propositions, the position is more challenging. We await their response. For the UK, the pressure on active management continues a pace and fund flows into index funds will continue to pressurise all investment firms to reduce fees.
Whilst this is undoubtedly great news for investors, in the longer term it may be that zero fee core funds mean that only scale investment houses can succeed and this may mean reduced choice for investors; we will see. In the meantime, we continue to look for ways to help our clients to achieve great investment returns at the lowest possible cost.