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Fidelity’s No-Fee Funds Could Benefit Its Competitors

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Fidelity may not be the only asset manager to benefit from its new no-fee index funds and lowered fees for other index funds. The surprise move, announced last week, is expected to help Fidelity increase market share but could also benefit its low-cost competitors such as BlackRock, Schwab and Vanguard.

Those firms, like Fidelity, have the “scale and/or more diversified business models with revenue streams other than base management fees such as securities lending or wealth management” to also offer zero rates, according to Fitch Ratings.

(Related: Fidelity Unleashes No-Fee Index Funds)

Moody’s Investors Service agrees that BlackRock and Vanguard — “significant competitors” to Fidelity — will benefit as the industry shifts even more “toward a model that anchors client relationships with commoditized, cheap or free passive products provided at the lowest end of a spectrum of advisory services.”

On Aug. 1, Fidelity announced the launch of two zero-fee funds — a total market index fund and international index fund — plus lower fees for 21 other index funds and elimination of account fees and investment minimums.

BlackRock heralded the move as one that will provide “greater access to iShares ETFs” on the Fidelity platform.

A Vanguard spokesman told ThinkAdvisor that the mutual fund giant “will continue to lower the cost of investing on our index and active funds, as we have for the past 40 years,” and Schwab similarly noted that it remains “laser focused on delivering straightforward, transparent and low-cost products” to investors. “Anytime costs go down, investors win.”

None of the three, however, lowered fees in response, as some have in the past.

(Related: Fidelity Cuts Trading Prices, and Schwab Follows)

Higher cost actively managed funds, however, are not expected to benefit from Fidelity’s no-fee funds move and are likely to be negatively impacted if Fidelity’s initiative inspires other firms to make similar moves.

“A broader rollout of zero-fee funds, or further reduction of current fee structures, would exacerbate the long-term earnings pressures facing traditional IMs,” according to the analysis by Fitch. “This would be particularly challenging for less diversified firms lacking scale, and could spur additional mergers and acquisitions.”

Performance and service will be key for traditional asset managers to maintain or expand their footing. “They will have to continue to deliver strong performance or otherwise support their distribution intermediaries with analytical tools or other sources of sales support,” according to Moody’s analysts.

“Fidelity’s zero-funds launch will only continue to sensitize investors to fees and likely relegate many companies as specialists focused on asset classes not easily indexed or accessible through passive investing vehicles.”

Active funds that fail to outperform are vulnerable, according to Fitch analysts who cite data from Dimensional Fund Advisors that only about 14% of surviving actively managed U.S. equity funds outperformed their benchmarks after fees over 15 years through the end of 2017.

Between 2016 and the first half of 2018, $563 billion flowed out of actively managed equity funds while $532 billion flowed into passive stock funds, according to Morningstar.