Fidelity won't levy proposed fees on purchases from boutique ETF firms, sources say

[May 30, 2024]  By Suzanne McGee

(Reuters) - Fidelity Investments will not impose new fees on investors buying exchange-traded funds (ETFs) issued by a group of smaller asset management firms, having made progress on a revenue-sharing agreement with issuers, sources familiar with the matter told Reuters.

Agreements with the issuers to cover some of the costs associated with trading on its platform would be a win for Fidelity, which initially faced resistance from the ETF community to the idea of the revenue-sharing agreement.

Fidelity warned a group of nine issuers in April that if those firms didn't negotiate or agree on a deal, their investors would have to pay up to $100 per ETF purchase on the Fidelity platform. Those fees would have been effective on June 3.

Smaller asset managers within the rapidly growing but highly competitive ETF industry worry about the impact of handing over as much as 15% of their revenue earned from sales on Fidelity's platform to the firm.

"The decision to harmonize some of our fee policies comes as our level of support and service for ETFs across the industry is growing rapidly," said a Fidelity spokesperson. The firm's aim is to ensure "a more consistent approach" to sharing the costs of maintaining a trading platform for ETFs and other assets.

Fidelity, which has allowed investors to trade ETFs without fees since 2019, last year asked the group of nine smaller issuers, including Simplify Asset Management, Rayliant Global Advisors and AXS Investments, to help shoulder operating costs.

It was unclear which of the nine firms have signed new revenue-sharing agreements with Fidelity and how many are still negotiating.

At least one of the investment boutiques, however, said Fidelity had left them between a rock and a hard place.

"One path - refusing to pay them and allowing our investors to be hit with this fee - is death," said Jason Hsu, founder and chairman of Rayliant Global Advisors, adding that investors would simply turn to other ETFs.

A sign marks a Fidelity Investments office in Boston, Massachusetts, U.S., April 28, 2022. REUTERS/Brian Snyder

The alternative "is to hand over a very large slice of the profit margins" on the firm's ETFs, he said, just days before beginning negotiations with the brokerage.

Rayliant has four ETF products, none of which have more than $100 million in assets.

The spat between Fidelity and the ETF issuers has given investors a glimpse into the economics of those trading platforms and their role in the growing ETF market. Over the last decade, both issuers and platforms have slashed fees to attract new investors.

"The shift by Fidelity and Schwab to offering their investors free trading in ETFs beginning in 2019 changed the landscape," said Dave Nadig, an independent ETF analyst.

Fidelity's attempt to extract fees from issuers "is completely unsurprising, since Fidelity can argue that it offers value, but for many of these issuers, paying 10% to 15% of their revenue would wipe out their margins."

ETF industry members worry that paying access fees will eventually make it tougher for them to launch new products, compete with industry giants and keep ETF fees low.

Taylor Krystkowiak, vice president and investment strategist at Themes ETFs, said the move “raises costs for us and potentially for investors, raises the bar for success and survival for new issuers, and empowers the big incumbent firms" like BlackRock Inc. and Fidelity itself to reinforce their market share. His firm was not one of the nine named by Fidelity as potentially subject to a surcharge.

"This is a giant step backwards," he said.

(Reporting by Suzanne McGee; Editing by Ira Iosebashvili and Sonali Paul)

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