Fidelity has won the race to the bottom, with a leading portfolio manager describing the move as a “tipping point” for the industry.
The Boston-based investment group, which has a whopping $2.4 trillion of assets under management, last week announced the most aggressive pricing in wealth management history; two new index-tracking mutual funds at 0% expense ratio. For free, basically.
The US division of the firm also cut the costs of all its other passive, index-tracking mutual funds. But what about the old adage that there’s no free lunch in investing?
Francis Sabourin, of Richardson GMP Limited, believes that when you see a major industry player like that hit zero, it represents a seminal moment for his profession.
However, the Montreal-based discretionary manager said the move is a marketing ploy that Fidelity can more than afford to make. According to the Financial Times, Fidelity made a record $5.3 billion operating profit on revenues of $18.2 billion last year, with the overall cost of its price strategy on index funds just $47 million.
He said: “Fidelity has so far had such a strong year so maybe they launch this but say, ‘hey, you can have this for free but look at our funds that are supposedly so expensive but after fees do better than these ETFs’.
“Maybe it’s a contrarian point of view but a case of saying ETFs [and passive] is good but don’t ever forget active management. Maybe it’s a marketing strategy to say, ‘we have [index funds] that are free but look at our star managers, they do way better, and they charge a fee.”
While Sabourin agrees the tactic is a case of getting investors through the shop door in order to sell more expensive, often better performing active products, he also believes this is the ultimate throw-down to advisors. The message is clear: raise your game.
He said: “My clients, they don’t pay for trading, they pay for wisdom, allocation, sector allocation, for investment goals … that’s what people pay for now.
“You can buy most of the things almost for free if you know what you are doing. The days of people in the 1970s and 1980s calling their broker and asking for live quotes and the broker charging them $200 … it’s over now.
“Now people can buy and sell almost for nothing but it’s proven that an advisor or portfolio manager with a decent track record will trade with way more value than a DIY investor.”
Sabourin says the onus, therefore, is on the advisor to combat this intense price competition by providing real person-to-person value.
He said: “We need to upscale our game for sure. Competition is there and the robo advisors are coming. Will that be successful? I don’t know. But at the end of the day it’s a people business, you talk to people and you have to understand their needs or their goals, and where they are scared.
“It’s people to people and you need to gear your strategies to fulfil their needs and fulfil their goals and try to manage their emotions.”
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