We usually look forward to the New Year - fresh, exciting, and full of possibility. Sometimes, news at the end of the year can rain on that parade. We have a small shower in regard to transaction fees at Fidelity.
As you may know, I am a frugal guy. I work hard to keep your trading costs low, and am proud that our underlying portfolio fees are minimal. This improves your chance of better returns. Because I am so cheap, Fidelity does not make much money on the accounts we hold there for you. A number of other firms in the industry believe in our cheap philosophy, and Fidelity does not make much money from these types of relationships. Unfortunately, Fidelity has caught on to our frugality...
Fidelity has notified us that they will be raising transaction fees associated with certain mutual funds. This will apply to a few select fund families that are not paying compensation to Fidelity for shareholder services. In some cases, the fee may increase to $50 per transaction from the current $25. For a parsimonious individual like me, this is not happy news.
Vanguard and Dimensional Fund Advisors (DFA) are two fund groups that will be impacted by the fee increase, and we use their funds regularly. Why do we pay transaction fees when other funds don't have them? The simple answer is that these transaction fee funds are generally much cheaper to own in the long-run.
Mutual funds that are "no-transaction fee" (NTF) investments tend to have substantially higher annual expenses. Fund companies pay a hefty fee to appear on the NTF list, and that cost is passed along to shareholders through higher internal fund expenses. These costs are priced into the fund on a daily basis, so they aren't apparent. But the expenses directly affect your return, and they are ongoing.
On the other hand, firms such as Vanguard and DFA do not pay fees to Fidelity (or any other custodian, for that matter) in order to keep their costs low. As a result, Fidelity assesses a fee for the purchase or sale of these funds. From a business standpoint, Fidelity wants to be compensated in one way or another.
But it's generally better to pay the nuisance transaction fees when you look at the math. Consider a typical fund that pays to be on the "no-transaction fee" platform. It's free to purchase, but the expenses coming out of the fund may be 1.0% higher than comparable Vanguard or DFA choices, and those costs are paid over and over, every year. Which would you prefer?
Fund A - which charges 1% more in fees per year to trade "for free" at Fidelity. For a $25,000 investment, this amounts to $250 in expenses each year, every year.
Fund B - which charges no additional fees because they do not care about being traded "for free" at Fidelity. Because of this Fidelity charges a $50 trading fee on the fund. This amounts to 0.2% for a $25,000 transaction in a DFA fund, and it's a one-time expense.
"Free" transactions can end up being quite costly over time.
To keep in line with your investment policy statement, we have to rebalance once a quarter. I hate paying fees to do this, especially now that the fees are going higher. What do I do to keep down fees? To minimize trading costs, we utilize transaction fee funds as "core" positions that we hold for extended periods. Smaller rebalancing trades are made using other mutual funds or exchange-traded funds. It's a combination that we feel makes the most sense. In evaluating investments we always consider the "net" cost of ownership. It definitely pays to watch both transaction fees and internal expenses.
Our main goal is to make certain we are doing what is right for you. We know you hate seeing transaction fees, and I hate seeing them too. I'll work hard to keep it to a minimum. Please let me know your thoughts and questions.