Did E*Trade Just Start a Mutual Fund Trading Fee War?

[Majick]

Fwiw...Per recent news from Barron's...see below.

...Don't have account at E*trade.Hope other Brokerage's NTF platform improves or adds Lower Cost Institutional M.Funds.
...Heard of INTF...Institutional No Transaction Fee (INTF) Funds platform?

Thanks.
Majick

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Did E*Trade Just Start a Mutual Fund Trading Fee War?

In the age before super-low-cost exchange-traded funds existed, E*Trade’s Dec. 13 announcement that all mutual funds will be free to trade would be a big deal. Now, it barely makes the headlines.

B ut for investors who still like actively managed funds, it is a big deal. While they can easily buy the indexed iShares Core S&P 500 ETF (IVV), with its cheap 0.03% expense ratio, for no transaction cost at Schwab or Fidelity, top-performing actively managed ETFs with a long-term record are harder to come by.

And you’ll have to pay a commission for top active mutual funds like the $107 billion Vanguard Wellington (VWELX). That fund has beaten 94% of its fund category peers over the past 15 years and has a 0.24% expense ratio, cheaper than most active ETFs.

E*Trade investors are now getting a great deal on funds like Wellington. But don’t expect the other online brokerages to immediately follow suit. Normally, to avoid the hefty fee on most brokerage platforms for Vanguard’s or Fidelity’s best actively managed funds, you will need to buy directly from Vanguard or Fidelity.

The transaction fees on online brokerage platforms can be substantial, especially for investors who make repeated purchases to add to their holdings over time. For instance, in October of 2021, Schwab announced it was raising its transaction fee to buy mutual funds run by Vanguard, Fidelity, or another low-cost manager, Dodge & Cox, from $49.95 to $74.95. Schwab charges advisors $45 to trade these funds. Fidelity also charges $75 to buy Vanguard and Dodge & Cox funds.

Notably, Vanguard’s brokerage charges just $20 per trade for Fidelity and Dodge & Cox funds for investors with less than $1 million in Vanguard funds and ETFs, but offers free fund trades for high-net-worth clients.

Vanguard isn’t on Schwab and Fidelity’s large no-transaction-fee, or NTF, mutual fund platforms because Vanguard has long refused to pay a portion of its management fees to be included. The cost to fund providers to be on such platforms ranges between 0.15% for institutional share classes for advisors and 0.40% for retail fund share classes—too much for the low-fee Vanguard to agree to pay.

ETrade shakes things up.* All of this makes the announcement from ETrade, a subsidiary of Morgan Stanley, interesting, as it means ETrade will have to eat the costs of offering commission-free funds from Vanguard and other shops that won’t pay the fee for inclusion. Morgan Stanley hasn’t made this cost public. According to Chad Turner, head of Morgan Stanley Wealth Management’s Digital Direct Channel: “While we have no specific numbers to disclose, client loyalty is and always has been paramount to us, and we believe that deepening our relationship with clients over time within E*Trade as well as across the entire wealth management offering far outweighs the impact of eliminating fees.”

The question now is will Schwab, Fidelity and Vanguard follow suit like they did during the race to zero commissions for ETFs and stocks in previous years? For now, the firms aren’t saying. Fidelity spokesperson Deanna Spaulding instead pointed to freebies already available in an email to Barron’s, stating Fidelity had “one of the largest online mutual fund supermarkets with more than 3,000 no-transaction-fee mutual funds… We regularly evaluate pricing across all of our products and services to ensure we are delivering the best overall value to clients.”

Schwab spokesperson Christine Hudacko also cited retail investors’ access to “7000 mutual funds through our OneSource, No Transaction Fee, platform.” But she added an interesting tidbit for advisors: “Earlier this year, we also introduced our Institutional No Transaction Fee (INTF) Funds platform for Adviser Services clients, adding over 900 institutional share classes from numerous well-known fund families to our NTF offering; we plan to expand this list over time.”

Indeed, this past February, Schwab began offering 120 funds’ institutional share classes, which have lower expense ratios than retail share classes, of T. Rowe Price mutual funds to registered investment advisors on its new INTF platform. This was followed by the addition this October of 800 more INTF funds from 15 different fund families, including heavy hitters such as BlackRock, Goldman Sachs, Franklin Templeton, Invesco, Janus, First Eagle and Legg Mason.

Could Vanguard, Fidelity or Dodge & Cox be next to join Schwab’s institutional platform? It seems doubtful. Says Hudacko: “The majority of mutual fund families pay Schwab/TD Ameritrade for necessary and important shareholder servicing expenses. Mutual funds require more operational support [than ETFs]… We believe Schwab is best positioned to support our ability to continue offering these very important products to our clients by ensuring our costs to operate the platform are covered.”

In other words, Schwab’s platforms remain pay-to-play, and Vanguard and others that aren’t paying are unlikely to join. Vanguard didn’t respond to multiple requests to comment.

For now, E*Trade has a distinct advantage in luring new investors seeking active management. Whether the benefits to the broker outweigh the costs remains to be seen.

For investors, remember to always weigh total costs versus the benefits of avoiding an upfront commission. You may pay more in fees over the life of an investment by choosing a fund with high expenses and no transaction fee, versus one with low expenses and a small upfront cost to buy it.

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[newtecher]

This is a good development. Wellstrade used to offer free MF trades with 250k+ in assets but recently removed that benefit. If this policy sticks, ETrade will look very attractive.

[rac98g]

It is a welcome development! I did notice that prior to this, Etrade removed some of the funds that they used to carry, however.

[yogibearbull]

A development to watch.

But the reality now is that Fido, Schwab, etc charge 25-50 bps fees for listing OEFs on their platforms. They say that developing, running and maintaining their NTF platforms cost money. They also say that their NTF platforms should be seen as replacements or supplements to funds' own administration/distribution operations.

Clearly, Vanguard cannot pay those kinds of NTF platform fees when many of its funds have ERs below those platform charges. It also has its own administrating/distribution operation - actually, the origin of Vanguard was in fund administration/distribution.

And if the NTF platforms do cost that much to operate, then it is unclear how long E*Trade/MS can absorb those costs.

My guess is that things will settle somewhere in the middle. Fido, Schwab, etc may reduce their NTF platform fees (say, to 10-25 bps) and more funds may become available as NTF. There may also be reciprocal NTF listing arrangements but the 2 parties involved need to have similar scales of OEF operations.

Brokerages are now eating the costs for providing commission-free trading for stocks, ETFs, CEFs. They use various tricks to support those, e.g. securities-lending, PFOFs (some is ok, lot is bad, Robinhood/HOOD really bad), counting on clients to use other services (brokerage cash balances, margin trading, etc) but those may not be available for OEFs.

[newtecher]

I really do not understand why it should cost 10-25 bps or more to offer NTF funds. All that is needed is just database updates over the internet, which costs practically nothing when done at scale. Sending prospectuses and reports by mail is the only real cost, but they could require online statements and other communications as a condition.

Over the last several years, we have seen trading fees get reduced and then largely eliminated for stocks/ETFs/CEFs and now treasuries. One difference is that, for bonds and stocks, brokers can manipulate execution and get the pennies they need for operations but spreads are not really an option for mutual funds.

Another equilibrium would be to drop the TF to $1 or so. Without knowing any details, I would think a buck should be fair compensation for the actual costs of record keeping. 

[yogibearbull]

newtecher , brokers are also the recordkeeper for OEFs, keeping track of all your buys/sells, reporting gains/losses to you and 1099 (IRS) and related customer issues (who do you call?). So, an OEF can just do portfolio management and compliance stuff, and farm out the rest (administration, distribution) to brokerage NTF or TF platform. This made possible many boutique fund shops with just a handful of portfolio managers and analysts. So, there are costs involved for the brokerages, but may not be as much as 25-50 bps. Those fees may have been justified when the systems were being created, but not now for operating them.

Many are not aware of this. But when you buy brokered CDs, the brokers also charge the banks 25-50 bps for those listing services too. You and I don't see those fees, but those brokered CDs are expensive to offer for the banks. But they can raise money quickly, in days, without tying up their office staff or doing local media publicity.

[newtecher]

I realize that there is recordkeeping to be done. But in this day and age, how much does it cost really to update some databases online? If they do a good job in the IT department, it should really just be pennies.

Perhaps I am lucky, but I never had to call a brokerage with a customer service issue. Again, the better job they do in the IT department, the less customer calls they will get.

[Deleted]

Transfer agents are a third party hired by fund companies for record keeping, so some expenses will be passed on to brokerage platforms offering their mutual funds.

[newtecher]

By the way, FirstTrade is a smaller brokerage that used to offer free mutual fund trades (but not stocks/ETFs/CEFs trading) about 15 years ago. I used them at that time but then moved multiple accounts to Wellstrade, which at the time was the only brokerage to offer free trades on stocks and mutual funds. Welltrade no longer offers free trades on mutual funds and is generally buggy.

I checked and now Firstrade offers free trades on both stocks and mutual funds. Sounds like I need to move accounts back there or to ETrade.