Zero fee investing has finally arrived. It’s been a long time since the time I was a financial adviser when my supervisor pushed me to sell high fee mutual funds (3% expense ratio) to today when expense ratios are coming down all the way to zero. 0%.

Still, the majority of mutual funds in Canada, have a high expense ratio, but they are slowly going away. Since the arrival of Vanguard, with its ultra-low management fees, with the arrival of Questrade where there is $0 commission for ETFs transaction, with the arrival of robot adviser NestWealth who charge a subscription service starting at $20/month, high expense ratios are on its way to extinction.

In addition, there are many stockbrokers, who are offering zero commission trading. Yes, the era of zero fee investing is here. It will be only a matter of time before all the bit broker houses transfer to this model.

More and more, low-cost services are showing up at our steeps and high fee mutual funds and high fee financial advisers are finding it difficult to justify their high fees or their high fee services.

A fee comparison: The standard high fee mutual fund and services vs. New lower fee products

Let’s say that your portfolio is $100,000. Under this assumption, a 3% MER (Management Expense Ratio) will be $3,000.

This is how high rates are crumbling down:

• The vanguard alternative. Assuming a 0.10% expense ratio, you would pay $100
• If you buy that index fund  Through Quest Trade, you will pay $0 commission
• If you buy it through the service of a robot adviser such as NestWealth, your total cost will be $120 ($20 per month) plus $100 (vanguard fee) total cost $220.

How could a commission-based financial adviser justify $3,000? How can a bank (salary based) financial adviser justify $3,000? They can’t! They are looking out for their own profit or the profit of their employer, but they are not looking out for you, the client.

The arrival of 0% management fee

Now, Fidelity Investments, in the United States, just announced the first 0% management fee index fund.

Can you imagine? a 0% management fee? How is a financial adviser be able to justify buying for you 3% management fee mutual funds, when you can get a similar fund for free?

Maybe Fidelity will not create a big shift in consumer behavior. There are many financial advisers pushing the high fee mutual funds and most consumers don’t know better. But fidelity has created enough noise to force some people to ask themselves: “Why am I paying so much.?”

How do these low-cost companies make money?

In the case of Vanguard, they have decided to be the market leader in low-cost ETFs and index funds. They make money by stealing market share from their competitors and by having economies of scale. Jack Bogle, the founder, was a frugal person, always looking for efficiencies and fighting against waste.

In the case of QuestTrade, my assumption (I don’t know this for a fact) is that free ETF trading is their loss leader, they sell it with the hope that clients will trade stocks at their regular price.

As far as  NestWealth, I do believe that with enough volume, they can make good money even at a subscription starting at $20/month.

As far as Fidelity, with their 0% Management fee, they use those funds as loss leaders, hoping investors use some of the other more expensive mutual funds. In addition, they do make money by lending shares to short-sellers.

Also, it’s worth noticing that Fidelity’s new 0% index fund doesn’t track any of the popular benchmarks, such as the S & P 500, in order not to pay for licensing fees. Instead, what they have done is to create their own indexes. This not necessarily a bad thing, but it’s good to be aware of it.

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