Schwab Plans to Charge for Shelf Space Next Year. It Could Hit Small Issuers Hardest

Free is a four-letter word, and the financial services industry can count as well as anyone.

After ending its platform fees five years ago with the wind-down of ETF OneSource, Charles Schwab is poised to reimplement them next year, Ignites reported last month. That follows moves by Fidelity, and other big broker-dealers like Morgan Stanley and LPL, to charge issuers for shelf space on their platforms. It’s not worrying large asset managers, but the fees could put pressure on small and new players to make their funds stand out.

“For smaller shops, it requires them to be more innovative and differentiated in the products they offer,” said Matt Kaufman, head of ETFs at Calamos. Conversely, “the benefit of being new is that it allows you to price in those platform fees.”

 Gotta Get Paid

Schwab has used platform fees before, specifically in its OneSource list of preferred products, but scrapped them when the firm got rid of transaction fees. Over the past five years, though, assets flowed into ETFs and largely out of mutual funds (share classes of which can include revenue-sharing). Many more ETFs have hit the market since, and the industry is on the cusp of dual share classes that will add even more products to the mix. Schwab is missing out on a revenue source, and asset managers acknowledge it.

The company noted the changing ETF landscape in a statement to ETF Upside and said it would work with fund companies in ways that would service clients’ best interests. “As our platforms grow in scale and sophistication, we are thoughtfully evaluating ETF issuer fees to ensure alignment with our focus on serving retail investors and advisors,” the company said. Sources told trade publication RIABiz that they anticipate Schwab applying fees similar to those Fidelity uses: 15% of what ETF issuers get or a $100 transaction fee charged to investors. 

Almost everyone has played along:

• There are fewer than 30 ETFs from several issuers available through Fidelity that don’t give the company a cut or pay a service fee, and buyers have to pay $100 for transactions.
• Asset managers told ETF Upside that platform charges are understandable and inevitable, though they may disproportionately affect smaller firms. “There may be some products that are not available out front,” F/m CEO Alex Morris said of the effect on newer issuers. 

Saved From Zero? Fund fees have been on the decline for years, although the recent surge in new actively managed ETFs has had the effect of skewing them slightly higher. Because asset managers will increasingly have to pay for distribution, the trend in ever-lower fees may be disrupted. “That money to pay them has to come from somewhere … We get it that it has to come out of us,” Morris said. “It is going to slow the pace of fees coming down across the industry.” 

It’s a shift in the fund environment, Kaufman said. “It provides transparency. The fees are fairly explicit, rather than being inside a fund information sheet,” he said. “I don’t really see that as a negative.”