The age of free ETF trades is ending

Meb Faber is angry. “Fidelity is morally bankrupt,” says the CEO of Cambria Investment Management. “Fidelity, no question, is one of the worst actors I’ve seen in 20 years.”

Faber is mad about the fees Fidelity’s brokerage charges exchange-traded fund managers to sell their products and investors to buy them. Since at least 2024, Fidelity, which has 57 million clients and $18 trillion under administration, has imposed placement fees on ETF providers like Cambria to be on Fidelity’s brokerage platform. These fees can account for as much as 15% of each ETF’s annual fee.

More recently, Fidelity has penalized ETF companies that won’t pay these placement fees, charging the ETFs’ end investors 5% of each purchase’s value, up to a maximum of $100 per trade. What started as a small stable of 28 ETFs on Fidelity’s “service fee” list in November swelled to 118 ETFs in June. Most are smaller ETFs run by boutique firms like Roundhill Investments and Miller Value Partners that need Fidelity’s platform to thrive.

“I think short term, it’s bad for holders of these small niche ETFs,” says Mike Watson, head of Axos Securities, a brokerage and custodian for financial advisors. “Some of those funds become almost untradable.”

Not all boutique-run ETFs are small. The $25 billion Roundhill Memory ETF became a surprise hit as microchip stocks soared in the past quarter. There’s a long thread on Reddit titled “Is DRAM still worth it with Fidelity’s 5% fee?” in which posters rage about the new fees and discuss switching to another broker.

But they may be out of luck. This April, Charles Schwab executives discussed on the company’s earnings call how it would soon charge similar ETF platform fees. Schwab CEO Rick Wurster explained: “There are places where there are people operating on our platform, they’re earning incredible margins, and we’re bringing the client to them or we’re doing the hard work, and we’re not capturing our fair share.”

Fidelity told Barron’s via email that it wants “a more consistent approach across mutual funds and ETFs” regarding the placement fees it charges. “As the support, service and infrastructure required to serve the growing ETF marketplace have expanded in recent years, that approach has evolved accordingly.”

“As our ETF platform grows in scale and sophistication, we have begun thoughtful, often bespoke, conversations with asset managers regarding platform fees,” Schwab said via email. “These discussions are expected to take place throughout this year, with implementation taking effect no later than Q1 2027.”

Investors will likely bear these costs as other brokers follow suit. Boutique ETFs may raise their fees to cover the placement costs, much like mutual funds did when they had to pay similar shelf-space fees to Fidelity and Schwab in the past.

Yet there’s an unlevel playing field with giants like Vanguard and BlackRock that are too powerful to squeeze. Although Fidelity’s goal is to capture 15% of ETF’s fee revenue, placement costs are privately negotiated with each ETF provider. Perth Tolle, founder of Life + Liberty Indexes and creator of the index tracked by the $3 billion Freedom 100 Emerging Markets ETF, says she knows firms paying anywhere between 2% at 15% of fee revenue. “There are different deals with everyone,” she says.

Tolle compares the pressure to make the payments to having “a gun to your client’s head. Our clients are everything to us. They are family. ‘I have a gun to your family’s head. You’re gonna pay or you’re not gonna pay?’ Of course, everyone’s gonna pay.”

Though Vanguard historically has refused to pay mutual fund placement fees, there’s evidence of a unique ETF arrangement with Fidelity. A Vanguard spokesperson said in an email: “Vanguard does not make payments for preferential placement or treatment of its products. Vanguard may make payments to financial service providers for things like events, data, and other services.” Payment for financial data is a common backdoor form of revenue sharing. Vanguard declined to disclose any details.

Expect more of the same from other brokers.

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