Schwab Raises Fees for Buying Fidelity and Vanguard Funds

Schwab’s stated reason for this shift is covering its record-keeping and other administrative costs. “The majority of mutual fund families pay Schwab/TD Ameritrade for necessary and important shareholder servicing expenses, but some do not,” says Alison Wertheim, a representative for Schwab (ticker: SCHW), in an email. “We are applying this different amount on retail mutual fund purchases only for funds from which we do not receive shareholder servicing compensation in order to offset the expense we incur in providing shareholder servicing.”

But is it a coincidence that Schwab is raising prices on two fund families with brokerage divisions that are its biggest competitors and the source of the fee wars? Wertheim says that competition with Vanguard and Fidelity isn’t the reason. But financial advisors, who are an important client base for the newly merged firm, are suspicious of its motives.

“The implication here is that the custodian can’t effectively serve this segment without a price increase,” says advisor Jayson Owens of Bright Road Wealth Management. “That might be true if record-keeping was [Schwab’s] entire revenue stream. A more honest statement would be, ‘We don’t make near as much money off of Vanguard investors as we do most mutual fund investors.’ ”

As for the fund companies in question, Vanguard representative Laura Bulman stated in an email, “Vanguard has a long-standing policy of not paying distribution fees that incentivize sales of our funds on third-party platforms.” Dodge & Cox and Fidelity declined to comment.

Other brokers have pushed back against Vanguard’s distribution policies in the past. Morgan Stanley (MS) dropped Vanguard mutual funds altogether in 2017. Fidelity raised its Vanguard fund trade costs in 2014. But this is the first big transaction cost increase since the most cutthroat zero-commission stock/exchange-traded-fund trade wars began in 2019.

For individual investors, the shift is likely to push them further into ETFs, which remain free to trade—though for how much longer is anyone’s guess. Interestingly, while Schwab raised the cost to buy mutual funds from these three managers, it eliminated the cost to sell any mutual fund that carries a transaction fee to buy it. But even this move prompted criticism from advisors. “Yes, the elimination of the transaction fee to sell matters, but I doubt that the intent is to help consumers,” says Patrick Whalen of Whalen Financial Planning. “By eliminating trading fees to sell a mutual fund, a barrier is being removed that keeps some consumers invested within mutual funds that do not generate revenue for Schwab/TD Ameritrade.”

Since the TD merger, Schwab has amassed $7.6 trillion in client assets and is the dominant player for registered investment advisors, controlling, with Fidelity and Pershing, 80% of the market, according to Cerulli Associates. Many RIAs are fee-based financial advisors who favor low-cost, no-load mutual funds like Vanguard’s, as opposed to commission-based advisors who work at full-service brokers such as Goldman Sachs Group (GS).

Owens thinks transaction cost increases will be coming for advisors, too, now that the TD merger is complete: “As an advisor who focuses on keeping hidden fees in check for our clients, we’ve been expecting these types of fee increases since the buyout.” Advisor Gabriel Shahin of Falcon Wealth Planning argues that the entire fee war was an acquisition ploy to force TD to merge. “They gouged each other because Charles Schwab wanted to buy TD Ameritrade,” he says. “When they forced [each another] to do free trades, it was strictly for an acquisition model. Now, you mostly have just Fidelity and Schwab, and they control the market.”

Wertheim stresses that “no further changes are anticipated” to Schwab’s pricing for fund trades established in 2018 for advisors. “Schwab Advisor Services lowered standard pricing for electronic [mutual fund] trades to $25 for both buy and sell transactions back in October 2018, but funds that didn’t pay for shareholder servicing…continue to be charged as outlined in their client pricing agreements, at a maximum of $45,” she says.

Moreover, those privately negotiated RIA pricing agreements can offer significantly cheaper trades if an advisor is a big client. “We represent trade volume of billions of dollars a year,” says advisor Elliot Dole of Buckingham Strategic Wealth, which manages $30 billion at Schwab, TD, and Fidelity. “Offering some low cost-number per trade is good business [for Schwab].” Yet smaller advisors are right to be concerned about the future, he says.

Dole finds the level of distrust amusing, noting that brokers have always found ways to make money either directly or indirectly, yet the fee wars have warped perceptions. “It just feels to investors and people I talk with that they think Schwab or Fidelity work for free,” he says.

Perhaps after the dust on the merger settles and costs stabilize, advisors will be less nervous about the transition—or at least come to accept the new regime.

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